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.

What is the RRM?

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:

1. Strike 1 – suspension of preferential tariff treatment for goods manufactured at the facility (loss of USMCA tariff preferences for goods from a facility and reversion to the MFN tariff rate) or the imposition of penalties on goods manufactured at, or services provided by, the facility;
2. Strike 2 – application of a remedy available for Strike 1 against all same or related goods or services, from all facilities in Mexico owned or controlled by the same person; and
3. Strike 3 – denial of entry into the U.S. of such goods.

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.

Why is the Atento case significant?

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.

What are the next steps in the case?

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.

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:

1. Certain machine tools and manufacturing equipment;
2. Certain manufacturing materials for semiconductors and related electronics;
3. Certain electronic test equipment;
4. Certain propellants, chemical precursors for propellants, and explosives;
5. Certain lubricants and lubricant additives;
6. Certain bearings;
7. Certain advanced optical systems; and
8. Certain navigation instruments.

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 Report and its findings herald a notable shift away from a “free trade” oriented U.S. export policy toward more hardline oversight and regulation of U.S. exports to the PRC and adversaries. According to the House Committee, the Chinese Communist Party’s (CCP) Military-Civil fusion strategy blurs the line between commercial and military items in such a way that requires the United States to abandon the “post-Cold War” distinction between economic and national security. In doing so, the Report calls on licensing officials to act less as the “voice of business” and more as U.S. regulators that are more “willing to deny licenses to export technology” to U.S. adversaries. It remains to be seen whether Congress or BIS will implement any of the recommendations, but it is clear the House Committee has serious concerns about the current state of play.

The Report makes several recommendations to address key areas of weakness in the United States’ approach to U.S. export controls, including the following:

1. Implement a majority vote system for the BIS’s Operating Committee, especially for exports to China. For the fiscal years of 2017–2019, there has been a 60 percent increase in non-consensus decisions of the Operating Committee, which adjudicates escalations from licensing decisions where reviewing agencies are not in agreement. According to the House Committee, these statistics raise concerns that the Operating Committee too often overrides the objections of other agencies by abusing Commerce’s role as both a Chair and a member. Implementation of this recommendation from the House Committee would likely make it more difficult for U.S. industry to obtain favorable licensing decisions through the escalation process.
2. BIS should impose a policy of denial for all exports of national security-controlled items to China to reduce the rate of approval. In 2020, nearly all exports to China of items listed on the Commerce Control List (CCL) were unlicensed. Even where required, BIS granted an overwhelming majority of requests to export or release U.S. software or technology to the PRC. The House Committee concluded that denying the value of these exports, which in 2021 reflected around 1 percent of U.S. exports to China, would hardly effect U.S.-China trade relations, while blunting CCP military ambitions. If implemented, U.S.-regulated firms involved in dual-use transactions with China would face stronger headwinds in obtaining licenses that historically have been granted.
3. BIS (or Congress) should apply a “presumption of denial” for all items subject to the EAR for companies on the Entity List and clearly define the term to mean that a license, no matter the item, will be denied in essentially every instance. BIS’s licensing regime is not strict enough in preventing the proliferation of U.S. technology to prohibited end users and end uses, according to the Report. The Report submits that too many license applications for companies appearing on the Entity List are approved despite being subject to a “presumption of denial,” with BIS approving $60 billion worth of licenses to Huawei during a six-month period between November 2020 and April 2021. Defining the term to limit BIS’s discretion, while also expanding the scope of items subject to the “presumption of denial” standard, would make it much more difficult if not impossible to engage in controlled transactions with Entity Listed PRC companies.
4. BIS should broaden the scope of Entity List requirements to subsidiaries and affiliates, and invest in enhanced, commercially-available mapping tools. The Report cites the effectiveness of the “50 percent rule,” a mechanism that the Treasury Department’s Office of Foreign Assets Control employs when administering economic sanctions against Specially Designated Nationals (SDNs) to “flow-down” U.S. sanctions requirements to certain entities majority owned by SDNs. The Report recommends that BIS similarly adopt, at the very least, a mechanism that would automatically apply Entity List licensing requirements to related PRC-entities in order to mitigate circumvention of U.S. export controls. In addition, the House Committee calls for investment in enhanced tools for screening and identifying linkages of PRC companies to CCP military. This measure, if implemented, could result in more entities being subject to Entity List restrictions, cutting off sales to unlisted subsidiaries.
5. The Department of Commerce must renegotiate its end-use agreement with the PRC or impose greater restrictions on exports to China considering the inability to conduct meaningful end-use checks. Unlike other countries, where U.S. export control officers have a good deal of discretion to conduct end-use checks for up to 5 years after shipment, end-use checks involving PRC shipments must occur within 180 days. Moreover, end-use checks on PRC shipments require PRC approval. According to the Report, this severely hinders BIS’s ability to monitor and ensure compliance with license terms. Should the Department of Commerce successfully re-negotiate these terms, U.S. exporters can expect greater and longer lasting U.S. official involvement in commercial relationships with PRC firms overseas, including more auditing of end users and end uses.

In addition to the above, the Report makes numerous other recommendations, including limitations on standard-setting loopholes, fees for certain export licensing requests, requirements to refer certain licensing decisions or CCL determinations to interested U.S. agencies, intensive review and transfer of EAR99 technologies to the CCL, and a continued push for bilateral and plurilateral export control agreements covering, at a minimum, AI, quantum, and biotechnology.

Key Takeaways:

In the run up to the election, neither Party will want to be regarded as “weak on China” or U.S. national security issues. And it is unlikely that the Commerce Department and BIS will push back against these recommendations in any public way.

So, while the administration and BIS may not implement every recommendation, the Report marks for the new year a movement toward a stricter policy position with respect to China, if not additional “tough on China” measures and rulemaking. As pressure on U.S. regulatory bodies continues to mount, U.S. industry should anticipate increased regulation and greater difficulty in obtaining licenses for export transactions involving China, even where those transactions involve EAR99 designated items.

Please contact our sanctions and export controls team if you require any assistance navigating this development.

Oil & Gas Sector

For six-months, General License No. 44 authorizes all transactions, including those involving Petróleos de Venezuela, S.A. (PdVSA) and PdVSA-owned entities, that are related to oil or gas sector operations in Venezuela, such as:

• Production, lifting, sale, and exportation of oil or gas from Venezuela, and provision of related goods and services;
• Payment of invoices;
• New investment; and
• Delivery of oil and gas from Venezuela to creditors of the Government of Venezuela (GoV), including PdVSA entities, for purposes of debt repayment.

While transactions with blocked financial institutions remain prohibited, new OFAC guidance indicates GL No. 44 extends to “ordinarily incident and necessary financial transactions” with Banco Central de Venezuela or Banco de Venezuela SA Banco Universal that are related to the oil and gas sector. Although GL No. 44 offers broad relief, OFAC has emphasized that other prohibitions remain in place, including but not limited to:

• New debt transactions, such as the provision of loans to PdVSA, that are not for the payment of invoices or repayment of debt through delivery of oil or gas;
• Transactions related to GoV virtual assets or debt owed by GoV and GoV-owned entities; and
• Transactions involving property blocked under the Venezuela sanctions regulations, or persons and entities that are blocked pursuant to another sanctions program.

GL No. 44 is set to expire on April 18, 2024 at 12:01 a.m. eastern daylight time, with OFAC indicating that the license will only be renewed if Venezuela meets its commitments and takes continued concrete steps toward a democratic election in 2024.

Gold Sector, Secondary Bond Market, Repatriation, and Other Actions

In addition to easing sanctions on Venezuela oil and gas, OFAC took several other actions, including the issuance of new, or broadening of existing, authorizations relating to Venezuelan gold, debt, and other transactions, as follows:

• OFAC’s General License No. 43 authorizes all transactions involving CVG Compania General de Mineria de Venezuela CA (Minerven) and Minerven-owned entities, with OFAC also temporarily suspending its policy of targeting for designation those operating in the gold sector of Venezuela’s economy.
• OFAC’s General License Nos. 3I and 9H amend prior licenses to remove restrictions on U.S. purchases or investments relating to certain Venezuelan sovereign bonds and pre-2017 bonds or equity issued by PdVSA.
• OFAC’s General License No. 45 authorizes transactions exclusively for the purpose of repatriation of certain Venezuelan nationals that involve Consorcio Venezolano de Industrias Aeronauticas y Servicios Aereos, S.A.
• OFAC delayed until January 18, 2024 the effective date of General License No. 5, which would authorize transactions relating to PdVSA’s 2020 8.5 percent bond.

Please contact our sanctions and export team if you have any questions regarding this latest development.

The EO uses a “small yard, high fence” approach to address national security threats posed by certain countries advancing the sensitive technologies listed above. Specifically, the EO requires development of regulations that would prohibit or otherwise impose notification requirements for U.S. persons regarding certain transactions involving countries of concern and the sub-sets of the three advanced technology areas. Of note, covered transactions would include not only traditional M&A, but also greenfield investments, joint ventures, and certain debt financing arrangements.

Importantly, the authorization granted to Treasury by this EO is far more narrow, both in covered countries and in product scope, than the current regulations for inbound U.S. investment (i.e., the Committee on Foreign Investment in the United States). Indeed, according to the Proposed Rule, Treasury does not expect the new regulations to entail a case-by-case review of U.S. outbound investments. Rather, the expectation is that the transaction parties will have an obligation to determine whether a given transaction is prohibited, subject to notification, or permissible without notification. Treasury is also considering an exception for specific types of transactions, such as certain investments into publicly-traded securities or into exchange traded funds.

Treasury published an Advance Notice of Proposed Rulemaking (“ANPRM”) requesting public comment on various topics related to implementation of the EO’s mandate. Information regarding the submission of comments can be found here and comments are due by September 28, 2023. In the ANPRM, Treasury outlines the kind of information it is seeking from commenters, which includes:

• Requirements on U.S. persons;
• Specific categories of covered transactions;
• Transactions involving covered foreign persons;
• Treasury’s methodology for excepted transactions; and
• Details on sub-sets of technologies and products within the three identified categories.

An overview of the Outbound Investment Program as it stands can be found here. If you are interested in submitting comments on the Proposed Rule, please contact our team.

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

The bill may be a response to reported concerns over the number of Huawei-related export licenses BIS granted last year. Regardless of whether it passes, the bill communicates Congressional concerns that BIS’s licensing process is too lax with respect to technology transfers to China and Russia—a statement that may influence the agency’s licensing process going forward.

Remarkably, the bill also features a provision that would “flow down” Entity List requirements and restrictions to entities that are—or are considered by the Secretary to be—50 percent or more owned, directly or indirectly, in the aggregate, by entities on the Entity List. While the Treasury Department’s Office of Foreign Assets Control has employed a similar rule in its administration of the Specially Designated Nationals and Blocked Persons List, BIS has not done so with respect to the Entity List.

While the prospects for the DENIAL Act are uncertain, there is no shortage of legislative vehicles – including the FY24 defense authorization bill and a pending Senate China competition bill – should it garner some Democratic support. At a minimum, consideration of these provisions sends a message to BIS about Congress’s view of export licensing policy and license approvals. And, if passed, these provisions will require updates to U.S. export control compliance program and screening practices.

Please contact our sanctions and export team with any questions regarding these latest developments.

• United States – Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India (DS436);
• India – Certain Measures Relating to Solar Cells and Solar Modules (DS456);
• United States – Certain Measures Relating to the Renewable Energy Sector (DS510);
• India – Export Related Measures (DS541);
• United States – Certain Measures on Steel and Aluminium Products (DS547); and
• India – Additional Duties on Certain Products from the United States (DS585).

While the United States made no additional concessions, India also agreed to remove retaliatory tariffs that it previously imposed on chickpeas, lentils, almonds, walnuts, apples, boric acid, and diagnostic reagents in response to former President Trump’s Section 232 duties on steel and aluminum.

In a release announcing the agreement, the Office of the U.S. Trade Representative stated that yesterday’s resolution “maintains the integrity of the U.S. Section 232 measures” and will “restore and expand market opportunities for U.S. agricultural producers and manufacturers.”

The fourth ministerial meeting covered a wide range of topics that focused on countering obstacles to the G7’s international rules-based system, including, among other things, diversifying supply chains, sanctions coordination, investment screening, and addressing emerging technologies such as quantum. Below is a select outline of the TTC’s outcomes and what to look for from the U.S. and EU going forward.

Cooperation on export controls and sanctions. Following Russia’s invasion of Ukraine, the U.S. and EU developed chains of communication to ensure that measures put in place to punish Russia for its actions were watertight. In particular, both the Treasury Department’s Office of Foreign Assets Control and the Commerce Department’s Bureau of Industry and Security have issued statements outlining the cooperation between the U.S. agencies and their European counterparts.

The TTC seeks to grow this cooperation through the consistent exchange of information on the application of controls as well as working to address enforcement and circumvention risks. Indeed, the U.S. and EU are coordinating with third countries to counter evasion of export restrictions on sensitive items and are conducting capacity building projects to enable third countries’ authorities to target export control evasion and circumvention more effectively.

Additionally, the TTC is working towards simplifying re-export procedures for exporters and developing a common understanding of how U.S. and EU export regulations are applied on both sides of the Atlantic. To that end, the U.S. and EU are also enhancing their technical consultation on regulatory developments.

Inbound investment screening. Last year, the U.S. announced measures aimed at strengthening its inbound investment screening mechanism, the Committee on Foreign Investment in the United States (“CFIUS”). The TTC recognizes the importance of CFIUS and similar EU mechanisms in flagging national security risks related to specific sensitive technologies and critical infrastructure. The TTC resolved to enhance U.S. and EU cooperation on inbound screening.

Outbound investment screening. Earlier this year, the U.S. took initial steps to “address the national security threats emanating from outbound investments from the United States in certain sectors critical for U.S. national security” and identify “the resources that would be required to establish and implement” such a screening program. The EU is also looking at developing a similar screening process for outbound investments. At the ministerial, the TTC recognized that addressing outbound investment concerns could be important to complement existing tools of controls on exports and inbound investments, and to that end, the TTC will be working on a coordinated response to outbound investment concerns pertaining to national security.

Semiconductors. One of the TTC’s overarching goals is securing supply chains for equitable use, which especially includes semiconductors as a critical technology. To that end, the TTC has developed an early warning mechanism for disruptions in the semiconductor supply chain. The TTC is also mindful of the competing U.S. CHIPS and Science Act and the European Chips Act. To prevent a “race to the bottom,” the TTC has put in place a consultation process to facilitate communication that will prevent further subsidy escalations.

Quantum technology. The TTC, recognizing the complex and fast-paced nature of the advancement of quantum technology, has established a joint Task Force to address open questions on science and technology cooperation in quantum technologies. The Task Force will be responsible for ensuring collaboration in research & development, the identification of critical components, standardization, defining benchmarking of quantum computers, and export control related issues for this technology.

Critical minerals. The TTC emphasized the need for the U.S. and EU to work together on supply chains for critical minerals, metals, and material inputs. The U.S. and EU are both reliant on imports, often from limited sources. This reliance leaves the countries vulnerable to disruptions such as geopolitical shocks and natural disasters. The TTC will be prioritizing securing the critical mineral supply chain going forward.

What’s Next?

The U.S. and EU, despite recent irritants regarding subsidies in the aforementioned CHIPS and Science Act and the European Chips Act, will continue to develop their policy coordination and implementation on amicable terms. The transatlantic economic relationship still has a lot of room to grow with a laser focus on boxing out countries that are looking to circumvent the G7’s international framework. While there may be challenges in implementing some of the outcomes of the TTC’s meeting, the U.S. and EU will likely be able to contain any potential setbacks through constructive dialogues established by the TTC.

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.

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.

In March, the U.S. Departments of Commerce and Treasury issued reports pursuant to the Consolidated Appropriations Act enacted last year, describing their efforts to establish a program to “address the national security threats emanating from outbound investments from the United States in certain sectors critical for U.S. national security” and “identifying the resources that would be required to establish and implement” such a program.[1]

While details of the scope of the proposed screening regime are limited, the Commerce and Treasury Department reports indicate that the focus would be on “investments that could result in the advancement of military and dual-use technologies by countries of concern” and “certain entities involved in a sub-set of certain key advanced technologies that are critical to U.S. national security.” Earlier reporting suggested that the focus would be limited to semiconductors, artificial intelligence, and quantum technology. The program would be implemented and administered by the Commerce and Treasury Departments, covering investments not already addressed by export controls, sanctions, or other related authorities, and actions taken under the program “may include prohibiting certain investments and/or collecting information about other investments to inform potential future action.”

The outbound investment screening regime has been the subject of some controversy, with some arguing that it can deter foreign investment in the United States, while proponents argue that it is necessary to protect national security and ensure that foreign investments do not pose a threat to the U.S. economy or its citizens.

This is not the first time the United States has pursued this kind of action. In 1968, President Johnson issued Executive Order 11378, “Governing Certain Capital Transfers Abroad,” which established an outbound investment review process to be administered by the Commerce Department, in response to the growing deficit and turmoil in the money markets. In 1986, President Reagan terminated the program and the program was determined not to be successful.

The United States is not alone in considering implementation of outbound investment screening to counter national security threats posed by China. On March 30, 2023, European Commission President Ursula von der Leyen addressed the Mercator Institute for China Studies and the European Policy Centre in Brussels. While discussing EU relations with China, President von der Leyen stated that the EU is “currently reflecting on if and how – Europe should develop a targeted instrument on outbound investment” that “would relate to a small number of sensitive technologies where investments can lead to the development of military capabilities that pose risks to national security.”

The executive order is expected as early as April of 2023 and is currently undergoing interagency review.

[1] See U.S. Department of Congress, International Trade Administration, Outbound Investment Initiative Report to Congress, https://subscriber.politicopro.com/f/?id=00000186-b8fb-d9f3-abef-bfffb67e0000; U.S. Department of Treasury, Proposed Program to Address National Security Threats Emanating from United States Outbound Investments, https://subscriber.politicopro.com/f/?id=00000186-b8fa-d147-a7f7-fefac9010000.

According to OFAC’s press release, Mr. Potanin is a close associate of President Vladimir Potanin, and Rosbank has served as an important credit institution for the Government of Russia, helping to fuel the war in Ukraine. Mr. Potanin is also a major shareholder of Norilsk Nickel, one of the world’s largest producers of palladium and refined nickel. OFAC confirmed in an FAQ that Norilsk Nickel is not blocked as a result of Mr. Potanin’s designation, which is consistent with publicly available information that Mr. Potanin owns less than the 50 percent required to trigger the extension of blocking sanctions on Norilsk Nickel.

Concurrent with Rosbank’s designation, OFAC issued General Licenses (“GLs”) 58 and 59 that authorize certain wind-down activities until 12:01 AM eastern daylight time, March 15, 2023. GL 58 authorizes transactions ordinarily incident and necessary to exit operations, contracts, or other agreements involving Rosbank or entities owned 50 percent or more, directly or indirectly, by Rosbank (collectively, “Rosbank entities”). GL 58 also authorizes U.S. financial institutions to reject, rather than block, all transactions ordinarily incident and necessary to the processing of funds involving Rosbank entities, as well as for individuals to close their accounts. GL 59 authorizes U.S. persons to divest or transfer securities in Rosbank entities during the wind-down period.

OFAC also added 17 subsidiaries of VTB Bank Public Joint Stock Company, Russia’s second largest bank, to the SDN List as part of this action, among other individuals and entities.

The Treasury Department’s Office of Foreign Assets Control (OFAC) and the Commerce Department’s Bureau of Industry and Security (BIS) also issued guidance today warning of the U.S. government’s intention to aggressively use existing authorities to impose sanctions against third country supporters of Russia’s military and defense sectors.

Blocking Sanctions

OFAC imposed blocking sanctions on companies in Russia, Belarus, China, and Armenia involved in supporting Russia’s military and related illicit procurement networks, including:

• Scientific-Technical Center for Electronic Warfare, engaged in research and development for Russia’s Ministry of Defense;
• Rotek Elpom, engaged in creation of certain stationary and vehicular-mounted security systems;
• ZAO NTTs Modul, engaged in production of computer and equipment and software used in Russia’s aviation and space sectors;
• OOO Valtex-ST, engaged in procurement of high technology scientific and industrial equipment;
• OAO Radioavionika (Radioavionika), engaged in production of technological products for Russia’s military defense; and
• Open Joint Stock Company Svetlogorsk Khimvolokno, Belarusian supplier to Russia’s defense-industrial base.

• Vladimir Aleksandrovich Ivanov, Sergey Vyacheslavovich Byzov, and Dmitrii Vladimirovich Galin, of Radioavionika’s leadership team;
• Novastream Limited and its General Director, Andrei Vladimirovich Khokhlov, operating in close coordination with Radioavionika; and
• Third Country Parties Sinno Electronics Co., Limited, of the People’s Republic of China, and Taco LLC, of Armenia, suppliers working with and supporting Radioavionika.

OFAC has also added hundreds of Russian government officials and their family members to the Specially Designated Nationals (SDN) List.

Business with—and any dealings in the property or property interests of—an SDN is broadly prohibited absent prior authorization from OFAC. This includes entities owned 50 percent or more, individually or in the aggregate, by one or more SDNs. U.S. persons must report any property or interests in property of the blocked parties in their possession or control to OFAC within 10 business days.

Entity List Designations

BIS also added 57 entities located in Russia and the Crimea region of Ukraine to its Entity List today, generally barring the export, re-export, or transfer of items subject to the Export Administration Regulations to the listed parties without a license. Companies added to the list include those involved in acquiring U.S. technology in support of Russia and firms that develop quantum technologies that may enable Russia to engage in malicious cyber activities or otherwise enhance Russia’s advanced production and development capabilities. Fifty of the 57 entries are subject to a “footnote 3” designation, subjecting those entities to the expansive Russia/Belarus-Military End User (MEU) Foreign Direct Product (FDP) rule.

Inclusion on BIS’s Entity List broadly prohibits the export, re-export, or transfer of items subject to the Export Administration Regulations to the listed parties without a license from BIS. For those subject to a “footnote 3” MEU FDP designation, complex licensing requirements may apply to export transactions with the listed entity involving foreign items that are the direct product of U.S. knowhow.

Warning of Additional Sanctions

Both OFAC and BIS issued guidance warning of a more aggressive sanctions response against third country supporters of Russian aggression.

OFAC indicated that the United States is prepared to use existing authorities to sanction targets that, among other things, engage in the following activities:

• Provide material support for the organization of Russia’s sham referenda or annexation;
• Provide material support to Russia’s military and defense industrial base;
• Attempt to circumvent or evade U.S. sanctions on Russia and Belarus; or
• Provide material support to blocked Russian parties.

OFAC reiterated that U.S. sanctions are not intended to target Ukraine or hinder the provision of food or medicine or humanitarian services.

BIS similarly advised that it is prepared to place export restrictions on companies and government entities in third countries that support Russia’s aggression. According to BIS, the agency will target those inside and outside of Russia that provide material support to Russia and Belarus’s military and industrial sectors, including those who replenish or backfill technologies subject to export control restrictions imposed by the United States and its allies.

G-7 and European Union Response

G-7 countries have also announced and implemented additional restrictions against Russia. Earlier this week, the United Kingdom imposed asset freeze restrictions targeting collaborators of Russia’s illegal sham referenda. The European Union is expected to follow suit, with reports indicating additional restrictions on Russia’s technology sector, trade in steel and steel products, and more.

Please contact our sanctions and export team with any questions regarding these latest developments.

Supply Chain Resilience. The EO directs the Committee to consider a covered transaction’s effect on supply chain resilience and security, both within and outside of the defense industrial base. The underlying message is that CFIUS should look broadly at supply chain effects of proposed acquisitions and not just focus on direct national security effects. The concept of the U.S. supply chain writ large as a CFIUS national security concern is relatively new and could lead to CFIUS reviews of more proposed transactions.

U.S. Technological Superiority. The EO identifies sectors crucial to the U.S.’s global technological advantage, including, but not limited to, microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies, and the agricultural industrial base. The EO directs the Committee to consider whether or not a transaction would compromise the manufacturing capabilities, services, critical mineral resources, or technologies of the listed sectors.

Industry Investment. The EO also directs the Committee to consider the risks arising from a covered transaction in the context of multiple acquisitions or investments in a single sector or in related sectors in order to safeguard any given sector from compromise / control by an adversarial foreign entity.

Cybersecurity. The EO directs the Committee to consider whether a covered transaction may provide a foreign person, or a third-party, with access to conduct malicious cyber activities, in addition to the cybersecurity posture, practices, capabilities, and access of all parties to the transaction that could afford a foreign person, or third-party, the ability to achieve such activities.

Sensitive Personal Data. The EO directs the Committee to consider whether a covered transaction involves a U.S. business with access to U.S. persons’ sensitive data, and whether the foreign investor has the ability to exploit such information to the detriment of national security, including through the use of commercial or other means.

This EO instructs CFIUS to pay attention to many areas that are already the focus of Committee activity – as reflected in the Committee’s regulations and in much of itsrecent activity. That said, the instruction on supply chains will encourage CFIUS to think more broadly in that area. The EO is also intended as a message to U.S. acquisition targets and to non-U.S. companies thinking about acquisitions, including Chinese companies that have been contemplating a stricter CFIUS landscape, that scrutiny of proposed transactions in the key areas listed will be enhanced even further. The EO is also a message that can be referenced in forthcoming mid-term election races that this administration is intent on protecting U.S. national security as defined very broadly by this EO.

Ban on Russia-Origin Gold & Gold Jewelry

The EU’s “maintenance and alignment” sanctions package imposes a ban on Russia-origin gold that broadly prohibits the direct or indirect import, transfer, or purchase of listed Russian-origin gold products (including jewelry) after July 22, 2022. The ban covers gold and jewelry that are processed in third countries and incorporate listed Russian-origin gold products.

Other “Maintenance and Alignment” Sanctions

The European Union took a number of other steps to strengthen existing sanctions against Russia, including the following:

• Expansion of items that are controlled for export to Russia as potentially contributing to Russia’s military capabilities and defense sector;
• Extension of port access ban to lock access;
• Permissions relating to the standard setting activities of the International Civil Aviation Organization;
• Exemption from prohibitions against transactions with Russian public entities that are necessary to ensure access to judicial, administrative or arbitral proceedings;
• Expansion on prohibition against acceptance of deposits to include entities established in third countries and majority owned by Russians, requirement that acceptance of deposits for non-prohibited cross-border trade be subject to prior authorization by competent authorities;
• Extension of exemption to prohibitions against transactions with certain Russian state-owned entities that are necessary for the transport of agricultural and oil products to third countries; and
• Clarification that third countries and their nationals may purchase pharmaceutical and medical products from Russia.

The EU’s latest package of sanctions expanded its list of designations to include additional 48 individuals and 9 entities. The latest expansion notably includes asset freeze restrictions on Sberbank.

As a reminder, all funds and economic resources belonging to designated individuals and entities shall be frozen under EU law, and those subject to EU jurisdiction are forbidden from making funds directly or indirectly available to designated targets.

New Sanctions

Various U.S. agencies imposed sanctions on transactions involving individuals and entities connected to Russian aggression in Ukraine.

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and U.S. State Department imposed blocking sanctions on dozens of individuals and entities supporting Russia’s defense sector. The designations target major state-owned defense companies, defense research organizations, and military operations in Ukraine implicated in international human rights violations.

OFAC designated 29 individuals and 70 entities, including the Russian defense-conglomerate, State Corporation Rostec (Rostec). The State Department sanctioned 29 individuals and 45 entities, including re-designation of Russia’s Federal Security Service (a.k.a. the FSB).

U.S. persons are prohibited from engaging in any direct or indirect dealings with SDNs without prior authorization from OFAC. All property or property interests of an SDN are also “blocked,” which means that any SDN property or property interest within the possession or control of a U.S. person must be formally frozen and reported to OFAC.

Today, OFAC also issued several general licenses authorizing transactions with certain newly designated SDNs, including:

• General License No. 39 authorizing transactions to wind-down activities with Rostec, as well as any entity in which Rostec owns, directly or indirectly, a 50 percent or greater interest, by August 11, 2022;
• General License No. 40 authorizing transactions involving specified SDNs related to the provision, export, or reexport of goods, technology, and services to ensure civil aviation safety;
• General License No. 41 authorizing transactions for the manufacture, sale, and maintenance of agricultural equipment produced by SDNs Nefaz Publicly Traded Company (Nefaz) or Public Joint Stock Company, Tutaev Motor Plant (Tutaev Motor Plant), or any entity in which Nefaz or Tutaev Motor Plant owns, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest; and
• General License No. 42 authorizing limited transactions related to requesting, receiving, utilizing, paying for, or dealing in licenses, permits, certifications, or notifications from the FSB.

Tariffs and Import Restrictions

Pursuant to the United States’ suspension of permanent normal trade relations with Russia and Belarus, the Biden Administration issued a proclamation yesterday increasing tariffs on more than 570 groups of Russian products. The 35 percent ad valorem duties are effective 12:01 a.m. eastern daylight time on July 27, 2022, and apply to a wide variety of products, including steel and aluminum, minerals, chemicals, wood and paper products, aircraft and parts, and automotive parts, among many others. The heightened duties will apply irrespective of antidumping and countervailing duties, or other fees or extractions applicable to the Russian products.

Ban on Gold Imports

Finally, OFAC imposed an import ban on Russian-origin gold, effective immediately. Russian-origin gold includes gold produced, manufactured, extracted, or processed in Russia but not gold that has been incorporated or substantially transformed into a foreign-made product. See OFAC FAQ 1019. There is a narrow exception related to imports of Russian-origin gold located outside of Russia prior to imposition of the import ban. As with OFAC’s prior restrictions on the gold market, a newly amended FAQ reiterates that gold market participants, including persons that process or facilitate gold-related transactions, could face sanctions for circumventing or engaging in prohibited gold-related transactions. See OFAC FAQ 1029.

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 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.

[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.

Services Ban

OFAC defines the sanctioned services as the following:

• “‘Accounting service’ – includes services related to the measurement, processing, and transfer of financial data about economic entities.
• ‘Trust and corporate formation services’ – includes services related to assisting persons in forming or structuring legal persons, such as trusts and corporations; acting or arranging for other persons to act as directors, secretaries, administrative trustees, trust fiduciaries, registered agents, or nominee shareholders of legal persons; providing a registered office, business address, correspondence address, or administrative address for legal persons; and providing administrative services for trusts. Please note that all of these activities are common activities of trust and corporate service providers (TCSPs), although they may be provided by other persons.
• ‘Management consulting services’ – includes services related to strategic advice; organizational and systems planning, evaluation, and selection; marketing objectives and policies; mergers, acquisitions, and organizational structure; staff augmentation and human resources policies and practices; and brand management.”

Concurrent with the new sanctions, OFAC issued two general licenses temporarily authorizing the continued provision of certain services to Russia. General License No. 34 authorizes transactions ordinarily incident and necessary to wind down the provision of sanctioned services to Russia until 12:01 am EDT on July 7, 2022. General License No. 35 authorizes the export of credit rating and auditing services to Russia until 12:01 am EDT on August 20, 2022. Neither general license authorizes dealings with SDNs or other blocked parties.

OFAC also issued a determination pursuant to E.O. 14024 that allows the agency to designate persons that operate or have operated in the accounting, trust and corporate formation services, or management consulting sectors of the Russian economy as SDNs in the future. A new FAQ provides definitions for each sector.

New Industrial Export Controls

The U.S. Nuclear Regulatory Commission (NRC), which administers export controls on more sensitive nuclear items, will also suspend general licenses that previously permitted export of source material, special nuclear material, byproduct material, and deuterium to Russia.

Sanctions on Russian Media Outlets

Additional SDNs