The Chevron framework required a court to first ascertain, in reviewing agency action, “whether Congress has directly spoken to the precise question at issue.” If the answer was no—meaning the governing statute was ambiguous or silent—then the court would proceed to step two of the analysis: “whether the agency’s answer is based on a permissible construction of the statute,” later formulated as a “reasonableness” standard (even if the court would have reached a different conclusion). Both Skidmore deference (a pre-Chevron doctrine discussed further below) and this Chevron two-step test stemmed from a fundamental recognition of an agency’s technical and practical expertise regarding the statute it is authorized to administer.
The Court in Loper Bright eliminated the agency deference afforded by step two of Chevron. In particular, the Court held that courts “may not defer to an agency interpretation of law simply because a statute is ambiguous” because courts, rather than agencies, have sole competency to resolve statutory ambiguity. Because countless statutes task federal agencies with administering and enforcing laws, issuing rules and regulations, and deciding disputes—often requiring an agency to fill in a gap or construe statutory text—the end of Chevron deference is a significant change in administrative law. How agencies and lower courts interact with Loper Bright, and the issues raised in unique areas of regulatory law, will take time to play out, and will likely result in substantial variation and disagreement across administrative and judicial bodies.
While Loper Bright marks a significant turning point by closing the door on Chevron deference, the Court’s decision does not entirely erase existing jurisprudence. Three takeaways from the decision stand out:
First, and perhaps most notably, the decision contemplates some continuity for prior holdings based on Chevron. The Court in Loper Bright emphasized that its overruling of Chevron did not “call into question prior cases that relied on the Chevron framework.” The Court stressed that “{m}ere reliance on Chevron cannot constitute a ‘special justification’ for overruling” settled cases.
Second, the question of what deference, if any, should be afforded to agency action will likely become more context-dependent and nuanced. Loper Bright makes clear that agency interpretations of law are not entitled to any deference, but also recognizes that the interpretation of statutory meaning by a responsible agency may aid, but not control, the court’s analysis. To that end, certain pre-Chevron frameworks ostensibly remain intact. For example, Justice Kagan in her dissenting opinion to Loper Bright notes that the Court’s decision leaves in place so-called “Skidmore deference,” stemming from the Court’s decision in Skidmore v. Swift & Co., 323 U.S. 134 (1944). Under that framework, an agency interpretation (including of legal issues, as the Loper Bright majority notes), may warrant consideration depending on “the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.”
Third, and in the same vein, the Court noted that agencies are still entitled to a deferential level of judicial review for “agency policymaking and factfinding,” citing the Administrative Procedure Act (“APA”). Under section 706(2)(A) of the APA, a court will defer to agency actions unless they are “arbitrary, capricious, {or} an abuse of discretion.” Under section 706(2)(E) of the APA, a court will defer to agency factfinding in formal proceedings unless such factfinding is “unsupported by substantial evidence.”
Despite these three takeaways from the Court’s decision, as with countless other areas of law, Loper Bright may portend changes in trade law. The agencies heavily involved in administering trade laws include U.S. Customs and Border Protection, the Office of the U.S. Trade Representative, the U.S. Department of Commerce, and the U.S. International Trade Commission. These agencies and the federal courts that hear most of the challenges to their decisions, the U.S. Court of International Trade (“CIT”) and the U.S. Court of Appeals for the Federal Circuit (“CAFC”), have invoked Chevron on many occasions. Here are three initial implications for trade law:
First, relatively new applications and rulemakings involving interpretations of trade statutes may be attractive targets for litigation in this new post-Chevron landscape. Agencies have had less time to interpret these newer laws. Thus, these laws implicate few if any “prior cases that relied on the Chevron framework” that might otherwise shield them from Loper Bright-motivated challenges. At the same time, not all agency actions, recent or otherwise, involve interpretation of the governing law. Commerce and the International Trade Commission, for example, conduct factfinding proceedings. Factual determinations in these proceedings will continue to be afforded deference under the APA standard and statutory text that closely tracks the APA (see 19 U.S.C. § 1516a) setting forth the standard of review applied by the CIT and CAFC.
Second, existing agency rules may present risks and opportunities for fresh analysis of the underlying statutory authority in the context of challenges to agency actions. Whether and when the CIT and the CAFC will be inclined to flex their statutory interpretative power, however, is difficult to predict. For example, both of these courts have cited Chevron in numerous cases: 828 before the CIT and 543 before the CAFC, according to a July 1, 2024 case search. Of these 1,371 decisions, however, the vast majority have merely mentioned or cited Chevron—and, thus, may not be viewed as having relied on Chevron for their holdings—rather than including a full analysis or discussion. The Court’s discussion of the stare decisis principle in Loper Bright has the potential to raise a number of questions regarding, for example, what constitutes “mere reliance” on Chevron that might protect a prior holding from being overruled and what subsequent agency actions stemming from that prior holding might also enjoy such protection.
In addition, these courts of specialized jurisdiction that are national in scope have often expressed deference toward the fact-intensive and particularized nature of trade agency actions and interpretations of relevant statutes. For example, the CAFC has previously held that the Commerce Department “is the ‘master of the antidumping law,’ and reviewing courts must accord deference to the agency in its selection and development of proper methodologies,” noting that “{a}ntidumping investigations are complex and complicated matters in which Commerce has particular expertise.” Thai Pineapple Pub. Co., Ltd. v. United States, 187 F.3d 1362, 1365-67 (Fed. Cir. 1999). Conceptually, that view suggests that actions by trade agencies may still warrant Skidmore deference.
Third, ongoing legislative reform attempts in Congress concerning trade matters might warrant greater attention. Affected industries should monitor proposed legislative bills for areas of potential ambiguity and an absence of clear delegation of discretionary authority to “give meaning to a specific statutory term.” The Loper Bright decision recognizes that even under the APA, the court’s role is to determine whether decision-making by an agency was “reasoned” within the bounds of its delegated statutory authority (itself a form of deference), thus bringing into stark relief the weight of such delegation, among other aspects of Congressional intent, when expressly stated by Congress. Stakeholder input at the congressional level will also take on added importance now that input through agency rulemaking and guidance may be less impactful in clarifying statutes.
In sum, in the short- and even medium-term, the likely scenario is substantial variation in application of Loper Bright in lower courts as litigation swells, which will almost certainly filter up to appellate circuit-specific disagreement. This expectation applies equally in the area of trade law, where decisions coming out of the CIT are unlikely to be uniform, as are decisions by different CAFC panels reviewing the CIT until the law resulting from Loper Bright settles.
]]>The NPRM would curtail the outflow of investment to “countries of concern” in relation to certain sensitive U.S. products and technology. The People’s Republic of China (PRC), along with the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau, remain the sole focus of the Executive Order and NPRM, subject to revision.
Overview
The outbound investment screening program will prohibit certain transactions while subjecting others to notification requirements. Of note, unlike the CFIUS review process, the notification requirement is post-closing and there is no review process under which notified transactions could be unwound.
The outbound investment screening program’s prohibitions would kick in for certain kinds of undertakings related to technologies and products that pose a particularly acute national security threat. The program’s notification requirements would similarly apply to other categories of activities related to technologies that may contribute to the threat to national security. The rules set out criteria for determining whether the transaction is prohibited or notifiable, such as by specifying certain performance parameters.
Subject to specific criteria, below is a list of activities that may be prohibited or otherwise subject to notification requirements based on the proposed rule:
Both triggers would be designed with a focus on preventing outbound U.S. investments that could enhance a country of concern’s military, intelligence, surveillance, or cyber-enabled capabilities.
Knowledge Requirement and Standard
Notably, in the case of certain greenfield, brownfield, or joint venture investments, the program’s requirements would trigger where a U.S. actor knows that the project will or intends to undertake any covered activity. Whether to incorporate a “knowledge” standard was a central point of discussion during the ANPRM process. In response to concerns surrounding the difficulty of ascertaining when a transaction is covered by the program, the NPRM defines “knowledge” as actual knowledge and also knowledge that could be gleaned from reasonable diligence, or awareness of a high probability a fact will occur.
Another key difference between the program’s prohibitions and notification requirements is that the rule as proposed would extend to instances where a U.S. actor knowingly directs a non-U.S. person or entity to engage in a transaction that would prohibited if undertaken by a U.S. person. The rule also covers investments in entities that are not in “countries of concern” in some situations where those entities are themselves investing in or controlling entities that do fall within the scope of the restrictions. The goal is to limit the workarounds that could exist through indirect investment activity.
Because U.S. actors will be responsible for determining their obligations under the rules, it is critical to become familiar with the reach of the Treasury Department’s proposed rule over U.S. and foreign entities’ activities.
Additional Changes
Other areas of evolution to note are the following:
An overview of the latest updates to the proposed Outbound Investment Program can be found here, alongside a Fact Sheet that addresses Frequently Asked Questions. Companies that are potentially impacted by the restrictions should consider commenting before the August 2, 2024 date. Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.
]]>Secondary Sanctions
The Treasury Department’s Office of Foreign Assets Control (“OFAC”) expanded its definition of “Russia’s military-industrial base” to include all persons blocked pursuant to Executive Order (“EO”) 14024. To that end, foreign financial institutions that are not currently subject to U.S. sanctions may run the risk of being sanctioned by OFAC for conducting or facilitating transactions, or providing any service, to any person blocked pursuant to EO 14024. OFAC has updated its guidance to foreign financial institutions on how to identify and mitigate sanctions risks. Such transactions would not need a U.S. nexus to be targeted by OFAC for secondary sanctions.
Software and Information Technology (“IT”)-Related Services Prohibitions
OFAC issued a Determination pursuant to EO 14071 prohibiting certain IT and software services to Russia. The Determination applies to IT consultancy and design services, and IT support services and cloud-based services for enterprise management software and design and manufacturing software. Certain services are excluded from the Determination, including:
OFAC issued General Licenses 6D and 25D to maintain authorizations for certain telecommunication and internet-related transactions, as well as humanitarian transactions. OFAC also issued FAQs 1181 - 1188 related to this Determination, which help explain what is and is not covered.
In conjunction with OFAC’s Determination, the Commerce Department’s Bureau of Industry and Security (“BIS”) issued a Final Rule imposing a license requirement on the export, reexport, or transfer (in country) of the following EAR99-designated software to Russia and Belarus:
These new BIS software restrictions are effective September 12, 2024. Importantly, this license requirement will also encompass any updates to the above software. There are limited exceptions to the above EAR99-designated software licensing requirement for certain civil end users, such as entities that operate exclusively in the medical or agricultural sectors. This new export controls ultimately expand the scope of prohibited services under the OFAC Determination above.
Restrictions on the use of License Exception Consumer Communications Devices (“CCD”)
In the Final Rule, BIS also narrowed the scope of commodities and software that may be authorized for export, reexport, or transfer (in-country) to Russia or Belarus under License Exception CCD. Specifically, BIS reorganized paragraphs (b)(1)-(17) and added new paragraph (18) of the license exception to make clear that the items under paragraphs (b)(1)-(8) are eligible for Cuba, Belarus, and Russia, and that the items under paragraphs (b)(9)-(b)(18) are only eligible for Cuba. These items include certain mobile phones, batteries and chargers, memory devices, and accessories thereof, among others, under certain Export Control Classification Numbers.
Further Restrictions Based on the U.S. Harmonized Tariff Schedule (“HTS”)
BIS added controls on 522 additional 6-digit HTS codes to the list of items requiring a license for export, reexport, or transfer (in-country) to Russia or Belarus in Supplement No. 4 to Part 746. The additional controls cover certain items in HTS Chapters:
A comprehensive spreadsheet of all HTS codes subject to BIS export controls can be found here under “Downloadable Compliance Resources.” Exporters should carefully review the items enumerated under the above chapters given the broad scope of these new restrictions.
Evasion, Circumvention, and Facilitation Related to U.S. Sanctions and Export Controls
In today’s announcement, both OFAC and BIS also continued to crack down on third-party procurement networks that aid Russia’s war effort in Ukraine. BIS added 5 entities in China and Russia to the Entity List for acquiring and attempting to acquire U.S.-origin items contributing to Russia’s military-industrial base.
Importantly, in an effort to target shell companies, BIS also introduced a new regulatory framework for listing addresses on the Entity List that present a high risk of unlawful diversion. Under the new framework, any company that uses an address previously identified via the Entity List (as a Purchaser, Intermediate Consignee, Ultimate Consignee, or End-User), will trigger a license requirement for transactions subject to the EAR, and BIS would not need to identify an associated entity name in order to list the address. To that end, BIS added eight addresses in Hong Kong to the Entity List under this new framework.
Additionally, OFAC targeted more than a dozen procurement networks, designating more than 90 individuals and entities across Russia, Belarus, the British Virgin Islands, Bulgaria, Kazakhstan, the Kyrgyz Republic, China, Serbia, South Africa, Türkiye, and the United Arab Emirates. The products produced by these entities cover machine tools, industrial materials, Russian-origin gold, microelectronics, chemicals, and unmanned aerial vehicle proliferation. All told, OFAC targeted more than 300 individuals and entities both in Russia and outside its borders.
If you have any questions regarding these developments, please contact our export and sanctions team for help analyzing the new restrictions and how to navigate them.
]]>The Federal Register notice (“Notice”) detailing USTR’s proposed modifications lists subheadings under the Harmonized Tariff Schedule of the United States (“HTSUS”) that would be eligible for temporary exclusion from Section 301 tariffs. Specifically, the Notice proposes that 19 product descriptions covering certain solar manufacturing equipment be granted temporary exclusion from Section 301 tariffs in order to promote the manufacture of solar panels in the United States and reduce reliance on imported panels. Further information about the machinery exclusion process will be set out in a separate notice published by USTR.
The deadline to submit comments addressing the proposed tariff increases is June 28, 2024, at 11:59 p.m. EST. Comments are to be submitted via the appropriate docket on USTR’s web portal at https://comments.ustr.gov.
Product Coverage
Appended to the Notice are two Annexes that, respectively, list the various tariff classifications for products that are covered by USTR’s proposed modifications to Section 301 tariffs, and, that are eligible for temporary exclusion from the tariffs. Under Appendix A, as proposed, U.S. imports from China would see an additional 382 HTSUS subheadings subject to heightened 301 tariffs, covering approximately $18 billion in trade. In addition to a wide array of aluminum and steel products and critical mineral subheadings, Appendix A provides for tariffs that would cover the following categories of products:
USTR’s proposed modifications to Section 301 ad valorem duty rates track those that were set out in the President’s announcement, including a 100% increase for certain Electric Vehicles, 50% for certain Solar Cells, and 25% for certain Steel and Aluminum products and Critical Minerals.
Implementation of the increased tariffs will be staggered, with increases taking effect between 2024 and 2026, according to the following schedule:
Please consult the Notice for a more detailed and comprehensive description of covered products.
Eligible and Proposed Exclusions
Appendix B, as proposed, identifies tariff classifications under Chapters 84 and 85 of the HTSUS that would be eligible for consideration under USTR’s temporary exclusion process for particular machinery used in domestic manufacturing. The identified subheadings involve products ranging from certain drilling and boring-machines, to certain hydraulic presses, to certain electric machines and more.
It is important to note that the Appendix B list of products-eligible for temporary exemption is merely a proposal, and will not necessarily take effect upon promulgation of USTR’s final rule. As such, it is imperative that interested parties carefully review Appendix B, and, where necessary, request temporary exclusion for any products by the June 28, 2024, at 11:59 p.m. EST deadline. As noted previously, USTR will be publishing a notice with additional guidance on the machinery exclusion process.
Appendix C proposes 19 temporary exclusions for solar manufacturing equipment, including tariff classifications applicable to the following categories of products:
The proposed exclusions took effect on May 22, 2024 and will remain in effect through May 31, 2025.
Comment Process
USTR is soliciting comment on the various proposals outlined in the Notice. With respect to USTR’s modifications to Section 301 tariff rates on Annex A items from China, the agency has invited interested parties to comment on the following:
With respect to Annex B products eligible for exclusion from the modified Section 301 tariffs, USTR’s notice invites comments on the following:
Lastly, USTR has requested comments on the proposed scope of subheadings excluded from the modified Section 301 tariffs under Annex C, including any amendment to product descriptions provided therein.
Again, comments on USTR’s proposed modifications to the Section 301 program must be submitted at https://comments.ustr.gov/ by June 28, 2024 at 11:59 p.m. EST.
* * *
Please contact our International Trade and Trade Remedies team with any questions or concerns about participating in the notice-and-comment process for modifying the Section 301 tariffs.
]]>On Tuesday, May 28, 2024, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended the Cuban Assets Control Regulations, 31 C.F.R Part 515 (CACR) in order to further loosen sanctions against Cuba. The changes are primarily related to the scope of authorized internet-based services and authorized dealings with the Cuban private sector. There are also changes related to “U-Turn” transactions, reporting requirements for telecommunications-related transactions, and educational activities, among other small language changes.
OFAC is now providing additional examples of services that will be allowed regarding communications over the internet, such as an amendment to § 515.578(a)(1) clarifying that cloud-based services that support internet communications may be exported to Cuba. The changes will include and expand other permitted services to support such communications. However, OFAC is still requiring that services related to items subject to the EAR can only be provided to items that are licensed or otherwise authorized by the Department of Commerce for exportation or re-exportation to Cuba. OFAC has also authorized exports and reexports of Cuban-origin software and mobile applications from the U.S. to third countries.
Under the regulations, OFAC historically authorized some transactions with “self-employed individuals.” The amendments also change the term “self-employed individual” to “independent private sector entrepreneur.” The term will continue to include self-employed individuals (cuentapropistas), but is expanded to cooperatives and private businesses wholly owned by or consisting solely of individuals to its definition. Private businesses and sole proprietorships of up to 100 employees will also be covered by the updated term. These changes will open the door to further transactions in Cuba that involve solely the private sector.
OFAC is also reinstating an authorization for “U-turn” transactions. This will facilitate remittances and payments for authorized transactions in the Cuban private sector. Any banking institution which is a person subject to U.S. jurisdiction will now be allowed “to process funds transfers in which Cuba or a Cuban national has an interest if the funds transfers originate and terminate outside the United States, provided that neither the originator nor the beneficiary is a person subject to U.S. jurisdiction.” Transactions outside of this scope will still be prohibited unless otherwise authorized or exempt under the regulations.
The reporting requirements are being amended to replace the fax or mailing requirement with a requirement to email reports to [email protected]. OFAC is also clarifying that the reporting requirement in paragraph (g) of § 515.542(g) applies to entities engaging in transactions to provide telecommunication services pursuant to paragraph (b), (c), or (d), and not banking institutions processing payments on behalf of such providers.
OFAC also published several new FAQs which can be found here. They address questions related to the definition of “independent private sector entrepreneur,” situations where Cuban state-owned entities are involved, authorized internet-based services to prohibited officials and communist party members in Cuba, due diligence expectations, and more.
For the full changes to the CACR by OFAC, please click here.
Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.
]]>On May 13, 2024, the United States-Mexico-Canada Agreement (USMCA) Rapid Response Labor Mechanism (RRM) panel decision in the San Martin mine case was published. The panel decision – dated April 26 – confirms previous reports that Mexico prevailed in the first RRM case to reach a panel, concerning events at Grupo Mexico’s lead, zinc, and copper mine in Zacatecas, Mexico.
The case began with a petition filed on May 15, 2023, by the three labor unions: the AFL-CIO, the United Steel Workers (USW), and Los Mineros, a Mexican mining union. The petition alleged that Grupo Mexico committed “denials of rights” (the term of art for a violation of Mexican law actionable under the RRM) by resuming operations at the San Martin mine despite an ongoing strike and by engaging in collective bargaining with a coalition of workers despite Los Mineros holding the right to represent workers at the mine.
The U.S. government agreed. On June 16, the U.S. requested that Mexico review the matter and suspended the final settlement of customs accounts related to entries into the U.S. of goods from the San Martin facility. The Government of Mexico reviewed the matter, but disagreed with the U.S. that there was a denial of rights. The U.S. then requested the establishment of an RRM panel on August 22 to decide the case. The panel was composed on August 30.[1][2]
What did the panel say?
The panel reached its decision on jurisdictional grounds – determining that denials of rights alleged by the U.S. were outside the scope of the RRM – and did not opine directly on the substantive merits of the case. In reaching this conclusion, the panel centered its analysis on three questions: (1) Is the San Martin mine a Covered Facility?; (2) Is the alleged Denial of Rights “brought under legislation that complies with Annex 23-A?”; and (3) Did the Denial of Rights occur before the USMCA entered into force?
Is the San Martin mine a Covered Facility?
Under the USMCA, the RRM can only be applied with respect to violations of certain Mexican labor laws at a Covered Facility.[3] The Agreement defines a Covered Facility as, “a facility in the territory of a Party[4] that: (i) produces a good or supplies a service traded between the Parties; or (ii) produces a good or supplies a service that competes in the territory of a Party with a good or a service of the other Party, and is a facility in a Priority Sector.”[5]
For both (i) and (ii), the panel determined that the U.S. government, as the complainant party, had the burden of demonstrating that the relevant goods originated from the specific facility in question. While the U.S. introduced evidence showing that IMMSA – a subsidiary of Grupo Mexico that owns the San Martin mine and other metal ore mines in Mexico – produced goods traded between the Parties and within Mexico, the panel found that the U.S. had not introduced sufficient evidence supporting such a conclusion for the San Martin mine, specifically. However, support for the U.S. argument came from an unexpected place.
In addition to the various filings of the U.S. and Mexican governments, Grupo Mexico/IMMSA also filed a brief with the panel. The panel found that while the U.S. had not established that the specific San Martin mine produced a good that met the requirements of (i) or (ii), the filing submitted by Grupo Mexico/IMMSA provided an admission that goods from the mine were sold within Mexico, satisfying the requirement under (ii).[6] The panel noted that, “IMMSA has provided during the verification process what the United States needed to show to meet its burden.” Finally, the panel concluded that the evidence submitted by the U.S. was sufficient to meet the “that competes” prong of (ii), and that the San Martin mine is thus a Covered Facility.[7]
Is the alleged Denial of Rights “brought under legislation that complies with Annex 23-A?”
For alleged denials of rights occurring in Mexico, the USMCA establishes that, “a claim can be brought only with respect to an alleged Denial of Rights under legislation that complies with Annex 23-A (Worker Representation in Collective Bargaining in Mexico).”
Annex 23-A of the USMCA describes a variety of labor law provisions that are reflected in the 2019 version of Mexico’s federal labor law (LFT). After a rather robust discussion, the panel concluded – and suggested that both the U.S. and Mexico agree – that the scope of Mexican labor laws that “comply with Annex 23-A” are those contained in the 2019 version of the LFT.[8] In the words of the panel, “it does not apply to prior versions of the 2019 LFT or other laws not currently in force.”
The alleged denials of rights in this case stemmed from a 2007 strike by Los Mineros at the San Martin mine. Throughout the many legal and procedural twists and turns that followed that strike, Los Mineros and Grupo Mexico/IMMSA both sought relief from the Mexican labor administrative entities that existed at the time, including the relevant Conciliation and Arbitration Board (CAB).
The 2019 LFT ended the CAB system in Mexico, replacing it with new labor courts and a new Federal Center for Conciliation and Labor Registration. However, the 2019 LFT contains a transitory article providing that cases initiated before the labor law reform – presumably for reasons of judicial and procedural economy – will continue to be heard by the CABs under the pre-2019 labor law.
Given this, the panel concluded that the alleged denial of rights was subject to the pre-2019 LFT law and Mexican labor institutions, and therefore outside the jurisdictional scope of the RRM.[9] This determination was the key issue for the panel in ruling against the U.S. in this case.
Did the Denial of Rights occur before the USMCA entered into force?
The panel, the U.S., and Mexico all agreed that matters occurring exclusively before the USMCA entered into force on July 1, 2020, are outside the scope of the RRM. However, the U.S. government argued that regardless of when the underlying labor strife at the San Martin mine began, there were specific denials of rights in this case that occurred after the USMCA entered into force, and these denials of rights anchored the dispute within the RRM’s temporal jurisdiction. Mexico, to the contrary, argued that the timing of the initiation of this sequence of events is dispositive, and that if activities post-entry into force derive from pre-entry into force events, the entire case is outside the temporal scope of the RRM.
The panel rejected Mexico’s argument, but neither did it directly adopt the U.S. argument. Rather, it put forward its own “framework for the Parties and future Panels to consider if a dispute with similar jurisdictional questions should again arise.” This framework elucidates three circumstances and their jurisdictional implications for the RRM:
The panel determined that the facts of the San Martin case align with the first circumstance of its framework. As such, it did not opine directly on the USMCA entry into force issue in this case.
And what about the underlying labor issues?
Since the San Martin case was decided on jurisdictional grounds, the panel did not address the merits of the underlying labor-related claims by the U.S. However, a separate, non-dissenting opinion written by one of the (unnamed) San Martin panelists details how events that occurred after entry into force of the USMCA – specifically, the San Martin mine’s management engaging in collective bargaining with a coalition of workers despite the fact that Los Mineros holds the right to represent workers there, as mentioned by the U.S. government in its request for review – likely would have constituted violations of the 2019 LFT if they had been subject to that law.
What happens next in this matter?
The panel’s decision is final, and no appeal of an RRM case is available. The only question in such cases is whether the losing Party will comply with the panel’s decision. In this case, the U.S. has already complied, announcing on May 13 that liquidation of entries from the San Martin mine into the U.S. would resume. However, outside of the RRM, it is not immediately clear whether the U.S. government will walk away from the San Martin mine situation or continue to press the matter under the USMCA via other mechanisms.
First, some context. The political dynamics involved in this case are significant. Grupo Mexico is ranked by Forbes as the fourth largest company in Mexico and has a significant political presence in the country. Los Mineros are led by a Mexican Senator affiliated with the same political coalition as Mexico’s current President and presumptive next President.[11] Los Mineros are also affiliated with the USW – a major U.S. labor union with a significant voice in U.S. trade policy across the last two U.S. Presidential administrations. USW published a statement on the San Martin panel decision, noting, “The fight for workers’ rights, including those at issue in this case, is far from over and we will examine what further actions are necessary and appropriate.” This does not seem like the sort of dynamic the U.S. is likely to just walk away from.
The mining industry is an area of emphasis for U.S. labor enforcement under the USMCA and is specifically designated as a priority sector for the RRM. A second RRM mining case, also filed by Los Mineros – this one against Peñoles’ Tizapa mine in the State of Mexico – is working its way through the process. The U.S. requested that Mexico review the matter on April 3 and Mexico’s report to the U.S. announcing the results of that review was expected last week.
In her statement regarding the San Martin panel’s decision, U.S. Trade Representative Katherine Tai said, “The Biden-Harris Administration remains steadfastly committed to using all the tools available under the USMCA to seek redress for the persistent problems in San Martin, and to continue to deliver real, tangible benefits for workers both at home and abroad.” What other tools under the USMCA might she be contemplating?
One possibility is that the U.S. government will decide to respond to the San Martin panel decision by filing a state-to-state case against Mexico under Article 23.3 or 23.5 of the USMCA. Such a case could focus on: (a) any alleged Mexican government labor law enforcement failures in the Mexican mining industry broadly, including with respect to the San Martin mine; or (b) any alleged insufficiency of Mexican labor laws, including the pre-2019 LFT as it is still being applied. If the U.S. were to prevail in such a case, the remedy it may impose – such as suspension of USMCA preferential tariff benefits – could also impact the entire Mexican mining industry. Notably, a state-to-state USMCA Chapter 23 case would avoid the jurisdictional issues that were decisive in the San Martin RRM case.[12] The likelihood of a state-to-state USMCA Chapter 23 case would seem to increase if the U.S. does not prevail in the current Tizapa mine case.
What does this decision mean for future cases? For the RRM overall?
1. No stare decisis, but RRM panelists are people, too. As a legal matter, RRM panel decisions do not set precedents for future cases. However, RRM panelists will certainly be aware of, and likely will have read, prior RRM panel decisions. And, of course, people are generally likely to agree with themselves. The pool of RRM panelists is relatively small – three pools of five panelists each. So having recurrent panelists in distinct RRM cases is not only likely, it is a certainty: one of the San Martin RRM panelists has already been named as a panelist for the second RRM panel, in the Atento case (for a broader discussion of that case and its implications, see my previous post).[13]
2. 2019 was five years ago (to be updated in 2025). The facts of the San Martin case are quite distinct. Based on my understanding, only two of the 21 other RRM cases brought by the U.S. to date could have been impacted by application of the San Martin panel’s approach, and both of those cases were among the first handful brought by the U.S in 2021 and 2022. Put another way, I do not believe that any of the 15 RRM cases brought by the U.S. government in the last year, other than San Martin, would have been impacted by this approach. The San Martin panel acknowledged the rarity of this fact pattern, stating that “[t]he factual and legal history of this dispute is highly unusual and unlikely to repeat itself.” As more time passes between the enactment of the 2019 LFT and the present moment, the more unlikely it becomes that RRM cases will focus on situations subject to pre-2019 law and labor institutions. Nevertheless, both the panel’s analytical approach to evaluating the issues presented in the San Martin case and its decisions on procedural elements of the case may present indicia of how future panels will consider similar circumstances.
3. Will this impact the type of RRM cases the U.S. government brings? To be candid, I think the U.S. government needs to decide what it wants the RRM to be, and what sorts of cases it wants to bring. The RRM can be (A) primarily a petition-driven process with a low evidentiary bar, resulting in a high quantity of cases, even if some cases are fairly weak and/or the magnitude of some cases (e.g., impact on trade, number of workers directly affected, market signal to other employers in Mexico, etc.) is minimal. Or it can be (B) a process with a balance of petition-driven cases – probably with a higher evidentiary bar for acting on those petitions in order to reserve some staffing resources – and cases self-initiated by the U.S. government that focus on strategically significant situations with greater magnitude. Thus far, 20 of the 22 cases brought by the U.S. government have been driven by petitions. I suspect that petitions will always be an important part of the U.S. view of the RRM, but it also seems possible that the San Martin decision, among other factors, could lead the U.S. to put more resources into building strong, strategically significant RRM cases on its own. Something to watch for.
4. Don’t forget about the 2026 USMCA joint review. Under USMCA Article 34.7, the Agreement terminates in 2036, unless each of the three countries decides to continue it. The countries are required to conduct a “joint review” of the operation of the USMCA on the sixth anniversary of the Agreement’s entry into force, which is July 1, 2026. At the joint review meeting, each country must indicate whether it wishes to extend the USMCA for another sixteen years, until 2052. If any country says no, then the countries must continue to meet annually until 2036 to see if they can reach consensus to extend the Agreement. This dynamic creates considerable leverage for a USMCA country that may seek to negotiate changes to the Agreement. Mexico and Canada seem likely to support the USMCA status quo; the U.S. may feel differently, regardless of the outcome of the November election.[14]
It's worth remembering how important the RRM was in generating U.S. political support for the USMCA. With the RRM, the USMCA was approved by both chambers of the U.S. Congress with historic margins and, in a first for a free trade agreement, was supported by the AFL-CIO.[15] The RRM is important to many members of the U.S. Congress and stakeholder groups they care about. It’s also worth remembering how we got to the RRM. The RRM was developed in response to the 2017 loss by the U.S. in the CAFTA-DR labor dispute with Guatemala. Like San Martin, the Guatemala decision included dicta from the panel noting that the U.S. had proven the existence of the underlying labor concerns, but the panel ruled against the U.S. on jurisdictional grounds. Hearing that the labor concerns were real, but the mechanism wasn’t apt to address them led to a rethink on how to develop a more tailored tool in future trade negotiations, landing on the USMCA RRM. Will the U.S. use the 2026 joint review to seek to make further tweaks, jurisdictional or otherwise, to the RRM?
5. Procedural rulings. The San Martin panel’s decision included annexes that shed light on various procedural issues that came up during the panel process. Given the uniqueness of the fact pattern in the San Martin case, these procedural rulings may be among the panel’s most enduring legacy in future cases. Here are a couple of the rulings in those annexes that are of particular relevance:
A. Assistance of counsel in RRM proceedings. In a ruling dated February 13, 2024, the panel clarified the role of private counsel for a Covered Facility in the RRM process. According to the panel, counsel for a Covered Facility (or its parent company) (a) may submit written views to the panel, (b) may submit additional information to the panel after their original submission, and (c) may participate in the verification process (where the panelists question representatives of the Covered Facility). The panel noted that counsel for IMMSA had been extended all of these opportunities. In fact, its filing was found by the panel to decisively support the U.S. government’s jurisdictional argument that the San Martin mine is a Covered Facility. However, the panel ruled that counsel for the Covered Facility may not participate in the hearing before the panel,[16] which is a government-to-government process where representatives of the Covered Facility are not present.
B. Submission of amicus curiae and filings by the public. In a ruling dated January 18, 2024, the panel clarified that, under the USMCA, a dispute settlement panel may accept written views by non-governmental entities, but any such filing must meet the specific criteria established in the Agreement, including with respect to the timing of the filing. In this case, the panel rejected an amicus curiae brief submitted by the U.S. Chamber of Commerce nearly four months after the relevant filing deadline.
The San Martin panel decision immediately marks a victory for Mexico and for Grupo Mexico, and a loss for the U.S and the petitioning unions. But answers to several of the broader questions referenced above – Will the U.S. walk away from San Martin or go bigger? What could this mean for the types of RRM cases the U.S. brings? What could this mean for the future of the RRM, particularly in light of the 2026 USMCA joint review? – could have the most profound implications going forward. Stay tuned.
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[1] Under the USMCA Rules of Procedure, the Mexican Section of the USMCA Secretariat composed the panel by selecting one panelist from each of the three lists under the Agreement – a list of Mexican nationals proposed by Mexico, a list of U.S. nationals proposed by the U.S. and a list of third-country nationals agreed upon by the U.S. and Mexico. The three panelists in this dispute were: Kevin Kolben (U.S.), a professor at Rutgers Business School; Lorenzo Roel (Mexico), an employer-side labor lawyer associated with Mexico’s major employers’ confederation; and Gary Cwitco (third-country), the panel’s chair, a Canadian union-side labor advocate.
[2] The USMCA required establishment and composition of the three lists by the date of the USMCA’s entry into force on July 1, 2020. For the U.S., this means that the lists of RRM panelists were developed during the Trump Administration. The USMCA requires that panelists be appointed for a minimum of four years or until the Parties constitute new lists.
[3] The RRM “shall apply whenever a Party (the “complainant Party”) has a good faith basis belief that workers at a Covered Facility are being denied the right of free association and collective bargaining under laws necessary to fulfill the obligations of the other Party (the “respondent Party”) under this Agreement (a “Denial of Rights”).” USMCA, Art. 31-A.3.
[4] The Parties in this case were the relevant USMCA Parties: the U.S. and Mexico. Canada has a separate RRM with Mexico, which it has utilized on one occasion. There is no RRM between Canada and the U.S.
[5] Id., Art. 31-A.15. Priority sectors are defined by the USMCA as “a sector that produces manufactured goods [including, but not limited to, aerospace products and components, autos and auto parts, cosmetic products, industrial baked goods, steel and aluminum, glass, pottery, plastic, forgings, and cement], supplies services, or involves mining.”
[6] According to the panel, “[a]s indicated by IMMSA, all the production from the San Martin mine is captively consumed by other IMMSA-affiliated facilities located in Mexico, which shows that the San Martin mine does indeed sell in Mexico and prima facie competes with other suppliers in the Mexican market.” Mexico – Measures Concerning Labor Rights at the San Martin Mine (MEX-USA-2023-31A-01), FN 71.
[7] The panel applied a preponderance of the evidence standard in finding competition, noting, “if it can be shown that like or substitutable goods or services are bought and sold in a market, it is more probable than not that they compete with each other.” Id., paragraph 60.
[8] While the panel did not directly address the issue, it is worth noting that the 2019 LFT revised and replaced portions of the prior LFT, and introduced new substantive and procedural provisions, but did not replace the entirety of the pre-existing LFT. In the panel proceedings, the U.S. argued that the entirety of the 2019 LFT is within scope for the RRM, not just the new provisions added on May 1 of that year. Mexico argued that only the new 2019 additions or revisions to the LFT are within the RRM’s scope. Of the four LFT articles cited by the U.S. as bases for Grupo Mexico’s denial of rights, three were new additions to the LFT in 2019 (Arts. 133 IV, 449, and 935) and one existed in the LFT prior to 2019 and was retained (Art. 133 VII). It is unclear from the panel’s discussion of the issue which scope they adopted in their references to the “2019 LFT.”
[9] As the panel put it, “[t]he litigation, the institutions involved, and the length of time to adjudicate are all specific to the prior system, and thus the Panel does not believe that the [RRM] envisages…that such cases were subject to its jurisdiction.” Mexico – Measures Concerning Labor Rights at the San Martin Mine (MEX-USA-2023-31A-01), paragraph 113.
[10] For example, if the 2007 strike had occurred after the relevant portions of the 2019 LFT entered into force, the subsequent parts of this fact pattern occurring after July 1, 2020, would be within the RRM’s scope.
[11] If the polling in advance of the country’s June 2 Presidential election is to be believed.
[12] USMCA Articles 23.3 and 23.5 do not require that a labor violation occur at a Covered Facility, but the relative jurisdictional equivalent is that a violation must occur “in a manner affecting trade or investment between the Parties.” However, both Articles contains a footnote that flips the burden of proof on that element, requiring that a panel presume a violation to be in a manner affecting trade or investment between the Parties, unless the responding Party demonstrates otherwise. Chapter 23 – unlike Annex 23-A – also clearly pertains to all Mexican labor laws, not just the 2019 LFT. This would seem to bring in any post-entry into force violations of the Chapter, even those still regulated and administered by the pre-2019 law and institutions.
[13] On May 8, Politico reported that the Atento RRM panel had been composed with the following members: Kevin Kolben (U.S.), a professor at Rutgers Business School; Graciela Bensusan (Mexico), a labor professor at UAM in Mexico City; and Pablo Lazo Grandi (third-country), the panel’s chair, a former Chilean labor official. In addition to Professor Kolben’s participation on both panels, the separate (non-dissenting) opinion written by one of the San Martin panelists cited to the statements of Professor Bensusan to establish the proposition that the 2019 LFT was violated in the San Martin case, notwithstanding the jurisdictional elements.
[14] On March 6, 2024, U.S. Trade Representative Katherine Tai described the 2026 joint review thus: “[Y]ou do not want that review to happen in a way that all three parties come to the conversation too comfortable. The whole point is to maintain a certain level of discomfort, which may involve a certain level of uncertainty, to keep the parties motivated to do the really hard thing, which is to continue to reevaluate our trade policies and our trade programs to ensure that they're really responding to the changes that are happening around us.” On May 16, 2024, U.S. National Economic Advisor Lael Brainard said, “To the extent that there are more systemic challenges that arise, we think about [the] 2026 review as being the opportunity to address those, to find areas where perhaps the USMCA was not sufficiently well engineered.”
[15] The AFL-CIO statement specifically referenced what would become the RRM: “For the first time, there truly will be enforceable labor standards—including a process that allows for the inspections of factories and facilities that are not living up to their obligations.”
[16] Verifications occur when the panel conducts its own fact-finding, including by visiting a Covered Facility (in-person or virtually) and speaking with affected workers and employers. USMCA, Rules of Procedure for Chapter 31 (Dispute Settlement), Section C, Arts. 11-12. This is distinct from the hearing before the panel, in which the Parties present their arguments and answer the panel’s questions. Id., Arts. 13-16.
]]>On May 16, 2024, the U.S. government’s Forced Labor Enforcement Task Force (“FLETF”) announced the addition of 26 new entities to the Uyghur Forced Labor Prevention Act (“UFLPA”) Entity List. The announcement was published on the Department of Homeland Security (“DHS”) website and can be found here. The draft Federal Register notice can be found here and will be published on May 17th. This brings the total number of entities to the list, available here, to 65.[1]
All of the entities were added to the section 2(d)(2)(B)(v) list of the UFLPA, which identifies entities that source material from Xinjiang, participate in “poverty alleviation” programs, or facilitate other government programs connected to forced labor. According to Appendix 1 of the Federal Register notice, the 26 entities are “cotton traders or warehouse facilities” which FLETF has found to source cotton from the Xinjiang region. Of the 26 entities, 21 were found to have marketed cotton sourced from Xinjiang on an online wholesale platform, which Kelley Drye has identified as likely being Mcotway. The remaining five were identified as sourcing cotton from Xinjiang through “corporate documents, websites, or media reports.” The majority of the 26 entities are located outside of Xinjiang.
The addition of 26 new entities is a significant increase to the Entity List and the largest that FLETF has undertaken since the UFLPA was passed. This suggests that FLEFT is responding to the calls from activists and Congress to further expand the Entity List.[2] It also suggests that FLETF is using a number of different tools to ease the burden of examining individual entities on its own, potentially including information received by CBP in connection with previous UFLPA detentions. There is significant overlap between the companies listed now by FLETF and companies which have made appearances in reports on forced labor from Sheffield Hallam University (including 17 out of this batch of 26), a reminder of the importance of paying attention to activist reporting in this space.
This update is significant not only for the number of companies added to the Entity List, but for the type of companies added. Notably, none of the entities on this list are producers of cotton in Xinjiang, or manufacturers engaged in a value-added process. Rather, these companies are trading and logistics companies, only two of which are located in the Xinjiang region. The consequence of including these companies, which operate in a strictly buy-sell capacity, is that shipments which have no Xinjiang-origin cotton may now be detained and not clearable through CBP custody simply as a result of connection to such traders in their supply chains.
Cotton is one of the high-priority sectors designated for UFLPA enforcement. Should FLETF continue this strategy of adding intermediate buyers and sellers of goods to the Entity List in other high-priority UFLPA enforcement sectors (such as polysilicon, or other sectors that may be added as high-priority sectors in the near future), then ensuring that raw materials are not sourced from Xinjiang (or China) will not necessarily be sufficient to avoid UFLPA detentions, or to successfully navigate such detentions that occur. Supply chains that are compliant today—even supply chains already reviewed and approved by CBP—could become non-compliant overnight, simply because a Chinese party in the supply chain has received shipments from Xinjiang, even if that company is not transacting in Chinese material in the context of that specific supply chain. While isotopic testing and certificates of origin have never been able to secure the release of detentions on their own, this expansion of Entity List scope to include cotton purchasers further underscores that such certification is not sufficient proof of a supply chain devoid of forced labor.
These developments underscore the importance of developing an in-depth understanding of the parties at every level of the supply chain through traceability and risk assessment efforts and providing detailed and thorough vetted traceability packages when a shipment is detained. Should you need assistance with either, Kelley Drye is able to help.
[1] Note that FLETF began counting named subsidiaries individually in December 2023, increasing the Entity List count by nine.
[2] Kelley Drye has been tracking Congressional letters on forced labor and the UFLPA, and this information is available upon request.
]]>Companies will need to account for this change when implementing sanctions compliance programs. Recordkeeping policies should be updated to ensure that companies keep ten years’ worth of transactional and compliance data to navigate future enforcement cases. Although the Act did not explicitly change recordkeeping requirements in the law, in practice companies are wise to change internal recordkeeping because regulators can now ask about compliance going back ten years. Internal investigations and voluntary self-disclosures will need to expand to review ten years of compliance as a best practice to cover the broader statute of limitations. Given already significant costs for internal investigations looking back five years, the new ten-year statute of limitations may change the calculus for conducting and scoping internal reviews. Additionally, in the mergers and acquisitions context, acquirers will need to expand due diligence to look back further in time, and seek representations and warranties that account for the longer statute of limitations.
It remains to be seen whether a similar expansion of the statute of limitations is forthcoming under export controls, including the Export Administration Regulations, to align with the Act’s changes. Many companies treat export and sanctions compliance under the same policies and procedures based on significant overlap between compliance with such laws. As a result, companies implementing changes to their sanctions compliance practices to account for the Act may also want to consider extending such changes to export controls compliance as well.
Please contact our sanctions compliance team for any further questions.
]]>The witnesses asserted that supplier audits conducted in the XUAR are unreliable, as the Chinese government obfuscates forced labor practices and criminalizes the investigation of such practices as a matter of policy. The discussion touched on the illustrative example of an audit conducted by Loening GmbH on a Volkswagen joint venture in the XUAR, which found no indication of forced labor at the site, despite the region’s widely-acknowledged state-sponsored forced labor programs. Although several senior staff at Loening disavowed the audit results and resigned, American index provider MSCI Inc. removed Volkswagen’s “red flag” status based on the audit. This underscores the broader concern beyond the unreliable nature of social compliance audits conducted in XUAR and highlights the sustainable sourcing certification agencies and indexing organizations that rely on and legitimize those audits, notwithstanding these deficiencies.
The witnesses emphasized, however, that social compliance audits elsewhere in the PRC – even outside of the XUAR – are still inherently unreliable. They noted the challenges in tracking the destinations of labor transfers outside of the XUAR and that the labor transfer program is expanding. The Uyghur Forced Labor Prevention Act (“UFLPA”) prohibits the importation of goods manufactured wholly or in part with forced labor in the PRC. This includes not only goods manufactured in the XUAR, but also goods manufactured in the PRC outside the XUAR with forced labor, including forced labor facilitated by means of labor transfer programs. Witnesses noted that the lack of independent worker organizations in the PRC makes properly assessing labor conditions more difficult, and that it is typical for managers to prepare facilities for an audit by creating fake time sheets and pressuring workers to provide inaccurate information. The witnesses stressed that off-site worker interviews are essential in reliable social compliance audits, but noted that this is rarely possible in the PRC.
General critiques of social compliance audits are not new, but any attempt to utilize such audits in an environment of state-sponsored forced labor exacerbates the approach’s deficiencies. The International Labor Organization (“ILO”) – along with much of the international community – seems to have acknowledged as much. In the ILO’s February 2024 update to their “Hard to see, harder to count” handbook on identifying forced labor, the organization includes for the first time an entire section on state-sponsored forced labor. In this context, the ILO’s pre-eminent handbook on identifying forced labor now formally recognizes that “large-scale labour transfers frequently involve elements of compulsory labour ‘as a means of political coercion and education’ and compulsory labour ‘as a means of racial, national, social or religious discrimination.’ Much like the evidence gathering that a reliable social compliance audit would seek to incorporate, the ILO notes that “[u]ndertaking research on state-imposed forced labour poses a number of unique practical challenges. As the State itself imposes this category of forced labour, States may have little incentive to collaborate with or facilitate the work of researchers wishing to shed light on it. Information access can be problematic.”
In short, companies that rely on social compliance audits conducted in the PRC – including, but not limited to, the XUAR – should not presume the accuracy of such audits as a factual matter, much less that they accurately identify forced labor trade enforcement risks under the UFLPA and related laws. There is certainly a role for both social compliance audits and certifications to help verify supply chains are free of forced labor, but companies should consider a more holistic approach and be cognizant of the challenges posed by state-sponsored forced labor, in particular. Please reach out to a Kelley Drye attorney if you have concerns about your supply chain and how your company could be impacted.
[1] The expert witnesses included: Thea Lee (Undersecretary for International Affairs at the U.S. Department of Labor), Scott Nova (Executive Director of the Worker Rights Consortium), Dr. Adrian Zenz (Senior Fellow and Director in China Studies at the Victims of Communism Memorial Foundation), and Jim Wormington (Senior Research and Advocate on Corporate Accountability at Human Rights Watch).
]]>CFIUS reviews “certain transactions involving foreign investment into businesses in the United States and certain transactions by foreign persons involving real estate in the United States” to understand the effect of such transactions on the United States’ national security. CFIUS enforces compliance with statutes, regulations, and negotiated agreements, using its ability to impose civil monetary penalties and other remedies.
The proposed rule has three key components. First it expands the subpoena authority to acquire information from “third persons not party to a transaction notified to CFIUS and in connection with assessing national security risk associated with non-notified transactions.” This will allow CFIUS to obtain more information for non-notified transactions, which CFIUS indicated would help it better assess which non-notified transactions require further review. Second, CFIUS would have increased authority to impose harsher penalties on those that provide incomplete or misleading information or otherwise violation CFIUS rules and regulations. The base maximum would be raised from $250,000 to $5,000,000. Lastly, the rule would institute an extendable timeline for parties to respond to risk mitigation proposals to allow CFIUS to conclude reviews or investigations within “the statutory time frame.” Importantly, parties will only have three business days to respond to risk mitigation proposals, which could create time crunches for negotiating with CFIUS.
Other items in the proposed rule include:
Parties affected by the rule have until May 11th to submit comments to Treasury. Those who frequently engage in the CFIUS review process may wish to submit comments during this time.
Please contact our CFIUS, export controls, and sanctions team if you need assistance navigating these latest developments.
]]>On April 16, 2024, USTR requested composition of an RRM panel, only the second such panel requested under the USMCA. This case centers on labor issues at two Atento Services call centers in Hidalgo, Mexico, which the U.S. asserts provide services to BBVA Mexico, a subsidiary of the Spanish multinational financial services company BBVA Group.
As explained in greater detail below, the Atento case is highly significant for the RRM, for services companies in Mexico, and for U.S. trade policy writ large.
The RRM requires individual companies operating in Mexico to comply with certain Mexican labor laws as designated by the USMCA. The RRM applies to all companies operating in a priority sector in Mexico – defined broadly to include all manufactured goods, mining, and services – that produce a good or supply a service traded between the U.S. and Mexico, or that compete with a U.S. good or service within Mexico. Petitioners can initiate a proceeding by requesting that the U.S. government review a matter, or the government can self-initiate a review.
The U.S. government has brought 22 RRM cases since the USMCA entered into force in July 2020, with 15 of these occurring in the last 11 months. USTR reports that 17 cases have resulted in comprehensive remediation plans or were otherwise successfully resolved to the satisfaction of the U.S. government. Also according to USTR, these cases have resulted in US $5 million in backpay and benefits to workers, reinstatements of dozens of terminated workers, and elections in which workers selected independent unions to represent them at nine facilities. Sixteen cases have focused on auto or auto parts facilities, two on mines, one on garments, and one on processed foods. Atento is the second case focused on a service provider.
Companies targeted in an RRM enforcement action and found in violation by the Parties (the U.S. and Mexican governments) or an RRM panel – a finding called a “denial of rights” – are subject to trade sanctions on a “three strike” basis, whereby the remedies become more severe for repeat violations, including:
Upon initiating a case, the U.S. government also issues a press release naming the company, and, for goods cases, usually suspends settlement of customs accounts from the facility.
As a key enforcement piece of the Trump Administration’s USMCA trade package and a priority for Congressional Democrats and the Biden Administration’s “worker-centered trade policy,” the RRM has achieved unique bipartisan support in Washington and is widely considered to be a model – or at least a jumping-off point – for future trade agreements.
Much of the RRM caseload to-date – 20 of 22 cases – has focused on trade in goods. This makes sense, as the remedies specifically spelled out in the USMCA focus on approaches that create significant penalties for non-compliant facilities engaged in goods trade, like increasing tariff rates or prohibiting importation of goods. It seems that service providers in Mexico and RRM petitioners have viewed potential RRM services cases as a bit of an afterthought. However, by requesting composition of an RRM panel in the Atento case, the U.S. government is clearly signaling that it disagrees. The U.S. government could have taken an off-ramp before it issued this panel request – it could have agreed to a settlement, for example, or taken the Mexican government’s announced actions to purportedly remediate the issue as sufficient to close out the matter – but instead it elevated the case in a way that has happened only once previously. This tells me two things about the government’s views of this case: (1) the U.S. government thinks its case is strong enough to win at panel; and (2) the U.S. government has a plan for the services-related remedies it will impose if it does.
Much of the attention on Atento has focused on the first point, and that makes sense. As the U.S. and Mexico both approach Presidential elections this year that re-emphasize political touchpoints around economic protectionism and sovereignty, and with the expiration of Mexico’s legitimation vote deadline that makes remediating RRM cases harder than just re-running a vote, and with the influx of Chinese electric vehicle investments in Mexico that has been called “an extinction level event” for the U.S. auto industry, the second RRM panel is a big deal.
But an analysis that stops with that first point misses the forest for the trees, because the implications of the second point are profound and could have ramifications for much of the Biden Administration’s trade policy, not just the RRM. The Biden Administration has sought to frame its trade policy as distinguishable from past approaches in a number of ways, but one notable distinction comes from its decision not to pursue negotiation of traditional market access, tariff-lowering, trade agreements. Since typical trade agreement enforcement in cases of non-compliance is conducted by taking away the market access that the agreement conferred, critics of the Biden Administration’s trade policy question whether the reportedly ambitious commitments it seeks in negotiations with Taiwan, Kenya, the EU, the UK, and 13 Indo-Pacific countries are actually enforceable. Without lowering tariffs, the critique goes, how will the U.S. make sure that its “worker-centered” trade policy is more than just words on paper?
It may be that the Atento RRM case is about to give us the U.S. government’s answer to that question. If the panel agrees with the U.S. government in Atento and permits the U.S. to impose remedies against the call centers involved in the case, we could gain concrete insight into what sorts of trade enforcement remedies it may be contemplating in each of the other trade agreements it is negotiating.
The immediate next step in the case is that the USMCA Secretariat (the Mexican section, as the respondent Party) has until April 19 to select by lot the three panelists that will make up the RRM panel. One panelist is selected from Mexico’s list of panelists, one from the U.S. list, and one from the joint list. The three lists were established when the USMCA entered into force in July 2020, so it’s worth noting that the U.S. chose its own panelists and agreed to the joint list during the Trump Administration.
Once constituted, the panel has five business days to confirm that the petition meets basic threshold requirements and then will issue to Mexico a request for verification. Unless Mexico objects to the verification request (in which case the U.S. would ask the panel to find a denial of rights), the panel is to conduct the verification within 30 days of Mexico’s receipt of the request. The panel then has an additional 30 days from the verification to determine if there has been a denial of rights.
However, these timelines should be taken with a grain of salt. In the first case to go to an RRM panel – concerning labor issues at a Grupo Mexico lead, zinc, and copper mine in Zacatecas, Mexico – the panel proceedings have taken much longer than provided for in the USMCA. In that case, the U.S. requested composition of an RRM panel on August 22, 2023. The panel reportedly did not conduct its verification until February 26, 2024, and heard oral arguments from the parties from February 28-29, 2024. The delays in the case have been ascribed to additional time needed by the Mexican secretariat to translate documents. The Grupo Mexico panel’s decision is expected soon, but the panel process has evinced some operational delays in the panel process that the Parties may want to address in their 2026 review of the USMCA.
]]>The Department is expanding its authority to review transactions relating to communications and telecommunications, after a significant period of relative inactivity. This marks one of the first major uses of this authority to flag items of risk coming into the United States.
The ANPRM outlines the risks of such technology from foreign adversaries used within CVs. The Department determined that ICTS can provide a direct entry point to “sensitive U.S. technology and data,” or that may be able to bypass certain safety and security measures within the CV. Thus, the Department determined that ICTS provided under the jurisdiction or direction of certain foreign countries or persons could be used to harm the United States’ critical infrastructure and national security. In a press release, the Department also named China as a threat in this context.
The Department is seeking feedback on a range of issues, providing an opportunity for industry players to help shape the scope and direction of the Department’s rulemaking process. Although in its very early stages, the ANPRM signifies an unprecedented use of authority under the ICTS Executive Order. Companies should be attentive to these developments, and consider consulting with counsel and submitting questions or concerns to the Department, as requested in the ANPRM.
Companies that manufacture, supply, or are otherwise involved with CVs should strongly consider submitting comments, especially those in the telecommunications industry.
Comments are due on April 30, 2024. Companies may email their comments directly to [email protected] with “RIN 0694-AJ56” in the subject line. Below are some additional details on submitting comments.
Please contact our export controls and sanctions team if you need assistance navigating these latest developments.
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Instructions: Comments sent by any other method, to any other address or individual, or received after the end of the comment period, may not be considered. For those seeking to submit confidential business information (CBI), please clearly mark such submissions as CBI and submit by email, as instructed above. Each CBI submission must also contain a summary of the CBI, clearly marked as public, in sufficient detail to permit a reasonable understanding of the substance of the information for public consumption. Such summary information will be posted on regulations.gov.
For further information, companies may contact: Marc Coldiron, U.S. Department of Commerce, telephone: 202-482-3678.
]]>Companies should carefully review the lists of newly restricted parties to ensure that they do not engage in transactions with these parties without a license. Any ongoing dealings with Russia should be reviewed anew to see if the additional sanctions apply. The sanctioned entities cross many different sectors and countries, and include:
Of note, entities owned 50% or more by the entities and individuals added to the SDN List are also subject to the sanctions. While OFAC issued a handful of general licenses to allow winddown of transactions with some of the newly sanctioned entities, these general licenses are limited in time and scope. Additional restrictions may be forthcoming as the U.S. and its allies seek to put further pressure on Russia and any third-country entities that are diverting products to Russia or otherwise circumventing sanctions.
Please contact our export and sanctions team for help analyzing the new sanctions and how to navigate them.
]]>The Commerce Department is soliciting comment on the proposed rules for 90 days, with submissions due to the agency by April 29, 2024. Key features of the NPRM and areas for comment are summarized below.
The new rule would require that U.S. providers of IaaS products (including U.S. resellers) implement and maintain a written, risked-based Customer Identification Program (CIP). The CIP is a Know-Your-Customer (KYC) program that would consist of data collection procedures for ascertaining and verifying the identities of current and prospective customers. Importantly, the requirement extends to confirming beneficial owners. For many companies, the requirements extend beyond the identification information currently collected from customers. Moreover, U.S. IaaS providers would need to ensure that foreign resellers of their IaaS products maintain and implement adequate CIP programs. U.S. IaaS provider would need to terminate their relationship with foreign resellers who do not adequately comply. To reduce compliance burdens, the Department proposes to allow foreign resellers, by agreement, to adopt or reference CIP programs created by U.S. IaaS providers. Providers would need to report to Commerce that they and their foreign resellers have a CIP, and annually certify information about the CIP thereafter. Although the Department is considering an adjustment period, compliance with any final rule would be required within one year of publication.
In response to comment, the Department has clarified that foreign subsidiaries of U.S. IaaS providers would not be covered under the current interpretation of the rules.
Additionally, the NPRM envisions a mechanism for requesting exemption from CIP requirements, and requests comment on proposed standards and procedures for adjudicating the same. The Department also welcomes information regarding (1) security best practices to deter abuse of U.S. IaaS products and (2) safe harbor activities that may form the basis of an exemption.
The NPRM proposes a procedure for imposing restrictions on certain foreign persons opening or maintaining IaaS accounts. Notably, the Department would be empowered to impose restrictions on specific foreign actors and all customers and potential customers within a specified foreign jurisdiction. If the Department exercises this authority, companies would need procedures in place to make sure prohibited foreign parties cannot open or maintain accounts. The Department would undergo a thorough investigation, based on its own accord or upon referral from other executive agencies or providers, to determine whether the following reasonable grounds exist that warrant special intervention:
In accordance with Executive Order, the proposed rule would require reports to the Department on instances of “training runs” by foreign persons for “large AI models with the potential for malicious cyber-enabled activity.” The requirement would cover transactions that result or could result in AI training meeting certain technical conditions. Providers would need to build in procedures to identify potential transactions for reporting.
By way of example, the Department notes that a foreign corporation proposing to train a large AI model on the computing infrastructure of a U.S. IaaS provider—and signs an agreement to provide such training—would be covered by the proposed requirement so long as the AI model’s specifications meet certain technical conditions. At this point, the Department’s standard for determining what technical conditions trigger the AI reporting requirement would reference interpretive rules published in the Federal Register and be updated based on technological advancements.
Nonetheless, the Department seeks comment on (1) the definition of “large AI models with the potential for malicious cyber-enabled activity” and (2) what red flags the Department should adopt that would create a presumption that a foreign person is training an AI model meeting the requisite technical conditions.
Outlined in the NPRM are several other elements of and considerations relating to the proposal, including data collection requirements and a discussion of cost burdens associated with implementing a CIP program. And the Department is soliciting comment on several other areas of the rule, including challenges that U.S. IaaS providers may face in investigating and remediating malicious cyber activity, the potential impact of the rule on small businesses, and more. Again, any such comments must be received by the Department by April 29, 2024.
Please contact our trade and national security team if you require any assistance navigating this development.
]]>BIS indicated that Wabtec violated Section 760.5 of the EAR, which requires U.S. persons to report the receipt of a request to engage in a restrictive trade practice or foreign boycott against a country friendly to the United States. Specifically, Wabtec received and failed to report 43 separate requests from a customer in Pakistan to withhold Israeli-origin goods, which were included as part of their orders, coming into Pakistan.
What is unique about this civil penalty is its size compared to other recent antiboycott penalties, especially given that Wabtec filed a voluntary self-disclosure on the boycotting activity. Given other recent heightened enforcement of antiboycott laws, this may be indicative of a new pattern of antiboycott enforcement by BIS, with more frequent and harsher penalties than before.
As has frequently been the case in antiboycott matters, the customer request involves refraining from use of Israeli-origin goods. Such requests may become more frequent due to rising geopolitical tensions in the Middle East. Any similar requests, relating to Israel or otherwise, must be rejected and reported to OAC. Companies identifying potential violations should consider a voluntary self-disclosure to mitigate damages.
Under part 760 of the EAR, U.S. persons are prohibited from taking certain actions that support or further an unsanctioned foreign boycott, especially towards countries friendly to the United States. This penalty serves as a reminder that U.S. persons must also report to OAC any boycott-related requests. Just rejecting the provisions, but failing to report, can result in significant penalties. Companies should ensure internal compliance procedures include procedures to identifying and reporting boycott requests.
Please contact our sanctions and export controls team if you require any assistance navigating this development.
]]>Among many specific requests for expanded enforcement, the letter makes an unprecedented call expanding the UFLPA Entity List to include companies outside of China (without proposing any revision to the statutory language).
As of January 26, 2024, the UFLPA Entity List is populated by 37 entities,[1] 25 of which are located within the Xinjiang Uyghur Autonomous Region (“XUAR”), and 12 of which are located elsewhere in China. The letter cites an “urgent need to expand the UFLPA Entity List to include numerous companies and entities located outside the XUAR,” which could be justified for Chinese companies that have participated in social programs that the U.S. regards as constituting forced labor.
But the letter also calls for “adding companies outside the PRC that profit from the use of Uyghur forced labor to the UFLPA Entity List.” (Letter at 4, emphasis added.) Later, the letter asks: “Despite nearly two billion dollars’ worth of shipments from third countries being detained for UFLPA violations, why has DHS not listed a single company outside the PRC on the UFLPA Entity List?” (Letter at 7, emphasis added.)
This request is made in the context of a call for U.S. Customs and Border Protection (CBP) to “aggressively step up enforcement of potential UFLPA violations by goods shipped from the PRC and indirectly through third countries.” As the letter notes, a significant volume of UFLPA detentions to date have been directed at goods of Vietnam and Malaysia. Accordingly, the continued aggressive enforcement by CBP of the UFLPA against third country goods would not be new; adding non-Chinese companies to the UFLPA Entity List, on the other hand, would represent a dramatic escalation of UFLPA enforcement.
The text of the UFLPA provides specific criteria for inclusion of an entity on the UFLPA Entity Lists. These include:
While potentially amenable to different interpretations, these categories do not obviously encompass “companies outside the PRC that profit from the use of Uyghur forced labor,” as proposed in the China Select Committee letter. The letter does not cite statutory text to justify this request.
In addition to the foregoing demand, the letter makes numerous additional requests including:
This letter is the latest in a long line of congressional correspondence to the Executive Branch calling for different manner of increased enforcement for the UFLPA. Kelley Drye is tracking all congressional correspondence related to the UFLPA and is happy to provide this information to clients upon request.
Should you have any further questions about the trends and developments in UFLPA enforcement, please do not hesitate to contact us.
[1] The letter mistakenly states that there are 41 entities listed. Four entities are listed twice under different categories of the UFLPA Entity List.
]]>BIS added 95 new HTS codes at the 6-digit level to the list of items requiring a license for export, reexport, or transfer (in-country) to Russia or Belarus. The expanded list of items includes certain chemicals, lubricants, and metals, and it covers the entirety of Chapter 88 of the HTS (aircraft, spacecraft, and parts thereof), further restricting Russia’s access to inputs for its defense industrial base. Other new HTS codes include 281830 (aluminum hydroxide), 283324 (nickel sulfate), and 284330 (gold compounds). The goal of the new HTS controls is to prevent additional related items not enumerated on the Commerce Control List from being exported to Russia and Belarus.
Additionally, BIS removed the lowest-level military and spacecraft-related items from being eligible for de minimis treatment when incorporated into foreign-made items for export from abroad or reexport to Russia or Belarus. This action brings additional foreign-made military and spacecraft items within the scope of the EAR if they include certain U.S. components, putting more pressure on Russia’s defense industrial base and making it more challenging for foreign suppliers to provide low-level military and spacecraft items to Russia and Belarus.
Finally, BIS made several clarifying and harmonizing changes, including by adding an exclusion from BIS license requirements in situations involving transactions that are related to deployments by the Armed Forces of Ukraine to or within the temporarily occupied Crimea region of Ukraine and covered regions of Ukraine.
Please contact our export controls and sanctions team if you need assistance navigating these latest developments.
]]>Notably, these FAQs curb any assumption that transactions eligible for the Notified Advanced Computing (NAC) license exception will enjoy routine authorization at the end of the 25-day review period. BIS intends to review notified transactions for national security concerns, and, where such concerns arise, will still require a specific license even if the advanced computing item under review satisfies the parameters set out under NAC eligibility requirements. BIS’s national security assessment may be based on a number of factors “including the type of item, quantity, and the end user/end use.” Thus, BIS also does not have any current plans to publish a list of advanced computing chips that are eligible for the exception. Parties seeking to avail themselves of the NACs license exception should plan accordingly.
The FAQs feature several other important clarifications, including the following:
Please contact our export controls and sanctions team if you need assistance navigating these latest developments.
]]>EO 14114 authorizes OFAC to impose U.S. sanctions on FFI’s that are either (1) facilitating significant transactions on behalf of persons designated for operating in certain key sectors of the Russian economy that support the country’s military-industrial base; or (2) facilitating significant transactions or providing services involving Russia’s military-industrial base, including those relating to specific manufacturing inputs and technological materials that Russia is seeking to obtain from foreign sources. If OFAC determines that an FFI is engaging in these restricted activities, then OFAC may prohibit the FFI from maintaining correspondent accounts or payable-through accounts in the United States. OFAC could also subject the FFI to full blocking sanctions through addition to the List of Specially Designated Nationals and Blocked Persons.
Separately, OFAC issued a Determination pursuant to EO 14024 listing certain items contributing to Russia’s military-industrial base that may trigger U.S. sanctions on FFIs who facilitate significant transactions involving such items. 29 items were identified across eight categories, which include:
OFAC issued FAQs 1148 – 1153 addressing the FFI sanctions developments.
Additionally, EO 14114 amends EO 14068 of March 11, 2022 (“Prohibiting Certain Imports, Exports, and New Investment With Respect to Continued Russian Federation Aggression”) by expanding the U.S. import ban on Russian-origin fish, seafood (and preparations thereof), alcoholic beverages, and non-industrial diamonds. Of note, the EO covers products, as determined by OFAC, that include any of the above Russian-origin products that were (1) mined, extracted, produced, or manufactured wholly or in part in the Russian Federation, or harvested in waters under the jurisdiction of Russia or by Russia-flagged vessels, even if such products have been incorporated or substantially transformed into other products outside of the Russian Federation; (2) products containing any of the products subject to the prohibitions; and (3) products subject to the prohibition that transited through or were exported from or by Russia. As a result, products coming from third countries must be scrutinized to see if they contain Russian-origin seafood, alcohol or diamonds, in order to determine if the import ban may apply. Separately, OFAC issued a Determination pursuant to EO 14068 specifying the type of seafood subject to the expanded import prohibition: salmon, cod, pollock, and crab.
OFAC issued FAQs 1154 – 1157 addressing the expanded import ban.
Finally, OFAC published a Sanctions Advisory to provide guidance to importers and financial institutions on how to identify and mitigate sanctions risks. The advisory contains examples of activities that could expose an FFI to sanctions risk, such as facilitating the sale, supply, or transfer of certain items to Russian importers or companies shipping the items to Russia. The advisory also outlines best practices that FFI’s can incorporate into their compliance programs to mitigate exposure to sanctions, and contains helpful links to previous guidance issued by OFAC on Russia sanctions. Companies that bank with FFIs who have high Russia exposure should be prepared for the possibility that the FFI itself is sanctioned.
Please contact our sanctions and export controls team if you require any assistance navigating these developments.
]]>The STA license exception authorizes a broad array of export activity that would otherwise require an export license, if certain notice and recordkeeping procedures are followed. However, historically, exporters have frequently sought an export license rather than relying on the STA exception. To increase usage of STA and decrease export license requests when STA is available, the proposed rule seeks to:
In addition to the proposed STA changes, BIS published two final rules also designed to ease certain categories of export licensing requirements and expand the availability of export license exceptions for key allied and partner countries.
The first rule changes licensing requirements for certain Australia Group (AG)-controlled pathogens and toxins (and their related technologies) so that no license is required to AG countries, unless the item is also subject to Chemical Weapons Convention controls. The rule also loosens licensing requirements on crime controls for certain countries.
The second rule expands license exception eligibility to additional countries for certain missile technology items excluding any countries of concern for missile technology reasons or that are subject to a U.S. arms embargo (i.e., countries specified in Country Groups D:4 or D:5). The rule also updates list-based controls to align with recent Missile Technology Control Regime control list changes.
Please contact our sanctions and export controls team if you require any assistance navigating these changes
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