Policy Updates

U.S. and Virginia Trade Policy Updates

July 25, 2023

U.S. Trade Negotiations

The U.S. continues negotiating trade agreements with a number of countries, including many that are major trading partners for Virginia companies. On May 24, the three parties to USMCA launched a cabinet-level committee aimed at strengthening regional competitiveness, but a lot of trade developments centered on Asia. The U.S. finished another negotiating round with the IPEF countries, which include important trading partners for Virginia companies, including Japan, Korea, Australia, and New Zealand. The U.S. also pledged to streamline supply chains with South Korea, negotiated a critical minerals trade deal with Japan, and finalized an agreement with Taiwan that would streamline customs procedures.

The U.S. also had trade discussions with Nepal, which included talks about the underutilization of the Nepal Trade Preference Program, and the U.S. finalized the second round of talks with Kenya focused on digital trade, standards collaboration, labor, agriculture, and women and youth empowerment. More details on these issues can be found below.

North American Partners Seek to Boost Regional Competitiveness

The U.S., Mexico, and Canada announced May 24 the launch of the North American Ministerial Committee on Economic Competitiveness, which will align cabinet-level efforts to strengthen regional competitiveness and productivity in industries such as semiconductors, clean energy, critical minerals, biomanufacturing, and information and communications technology. The three USMCA partners said they are also working to “enhance North America’s status as a trusted supplier of semiconductors, printed circuit boards, and related technologies in the face of shifting global supply chains, while cultivating domestic expertise and supporting the transition to both a digital and green global economy.” These efforts could ultimately make it easier for Virginia companies to trade within North America. For more information, click here.

Indo-Pacific Trade Talks Advance

The third negotiating round for the Indo-Pacific Economic Framework was held May 8-15 in Singapore. Discussions centered on four pillars: supply chains, trade, clean economy, and fair economy. IPEF was launched in spring 2022 with Australia, Brunei, India, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam, each of which except India has pledged to take part in all the initiative's four pillars (India opted out of trade).

While the IPEF talks do not address tariff issues, meaning they will not result in a free trade agreement, the U.S. is seeking to remove other non-tariff barriers. The outcome could thus make it easier for Virginia companies to export their goods into IPEF markets. For more information, click here.

Efforts to Expand Trade with Central Asia Continue

Continuing U.S. efforts over the past few years to expand trade collaboration with Central Asian countries to counter influences from Russia and China, senior U.S. officials met recently with their counterparts from under the U.S.-Central Asia Trade and Investment Framework Agreement. According to the Office of the U.S. Trade Representative, the U.S. reiterated the importance of creating a more favorable environment in the region for foreign investment and private-sector activity.

For their part, regional countries highlighted their interest in the reauthorization of the U.S.’ Generalized System of Preferences, which normally provides lower duties on thousands of products from beneficiary countries but has been dormant for the past few years, and “underscored [GSP’s] role fostering growth in the economic relationship between the United States and its Central Asian partners.” These discussions may lead to a better shared understanding on other market access issues and may increase pressure for a reauthorization of GSP, which would benefit Virginia importers. For more information, click here.

U.S., Korea Pledge to Broaden Trade and Supply Chain Cooperation

During a recent state visit to the U.S. by South Korean President Yoon Suk Yeol, the two sides announced several efforts to further broaden cooperation, including efforts around supply chains and critical minerals. The two sides recently held the first ministerial-level meeting of the U.S.-Korea Supply Chain and Commercial Dialogue, where they formally launched a new Digital Economy Working Group and discussed coordinating export controls, semiconductor collaboration and supply chain resiliency, and the prospects for new workstreams on robotics and additive manufacturing.

Through the first quarter of 2023, South Korea is a top 20 export destination for Virginia companies. Streamlining supply chains around advanced manufacturing in semiconductors and robotics could be useful for Virginia companies. For more information, click here.

Critical Minerals Agreement with Japan In Effect

A new U.S.-Japan agreement took effect a few weeks ago that could qualify Japanese electric vehicles for a U.S. consumer purchase tax credit. According to the Office of the U.S. Trade Representative, the agreement seeks to diversify the supply chains of electric vehicle battery critical minerals (lithium, nickel, cobalt, graphite, and manganese) and increase resilience against threats such as economic coercion and non-market policies and practices (a thinly veiled reference to China). It also establishes new commitments and areas for joint cooperation. For Virginia companies involved in the electric vehicle auto trade that may be struggling to meet the origin requirements for inputs to qualify for the tax credits, this agreement could be instrumental to gaining those benefits. For more information, click here.

Taiwan Trade Agreement Covers Customs, Trade Facilitation, and Other Issues

An early harvest agreement under the U.S.-Taiwan Initiative on 21st Century Trade that aims to streamline border procedures was signed June 1. The Office of the U.S. Trade Representative said that the two sides will next launch talks on additional (and generally considered to be more challenging) issues set forth in the initiative’s negotiating mandate, and Taiwanese officials said they hope to conclude those negotiations by the end of the year. This initiative was launched in June 2022 after the U.S. left Taiwan out of the Indo-Pacific Economic Partnership due to concerns about how its inclusion might be received in China.

Similar to IPEF, these discussions are likely to address non-tariff barriers, making it easier for Virginia companies to export their goods into this market. For more information, click here.

Kenya Trade Talks Advance

Officials discussed a number of issues during the second round of negotiations on the U.S. - Kenya Strategic Trade and Investment Partnership held April 17-20. According to the Office of the U.S. Trade Representative, discussion topics included agriculture; anticorruption; micro, small, and medium-sized enterprises; and services domestic regulation. Kenyan trade minister Moses Kuria said there were “tremendous advancements” made in these areas as well as digital trade, standards collaboration, labor, agriculture, and women and youth empowerment.

The STIP was announced in July 2022 and is meant to replace negotiations on a bilateral free trade agreement launched under the Trump administration. Kenya is a relatively small trading partner to the United States, but these discussions could open up future opportunities for Virginia companies looking to export their goods abroad. For more information, click here.

U.S. Pushes for Progress on Trade Issues with Nepal

On May 19, the U.S. and Nepal held the sixth meeting of the bilateral Trade and Investment Framework Agreement Council. Officials discussed a range of bilateral trade and investment-related issues covered under the TIFA, including policies impacting the investment climate, digital economy, intellectual property protection and enforcement, and more.

Nepalese officials shared concern about the underutilization of the Nepal Trade Preference Program, which grants Nepal non-reciprocal duty-free treatment for certain travel goods, apparel, made-up textiles, and headgear products covered by 77 eight-digit HTSUS tariff lines otherwise ineligible for duty-free treatment under the Generalized System of Preferences. The next TIFA Council meeting will take place in Washington, D.C., in 2024. Although Nepal is a relatively small market, the U.S. is Nepal’s largest export destination after India and could be a good source for textiles and apparel, especially considering its advantages under GSP and the NTPP. For more information, click here.

U.S. Trade Activity

In addition to trade negotiations, U.S. trade officials have taken many measures that could impact Virginia companies. U.S. officials have reiterated their desire to pursue friendshoring in order to reduce reliance on the Chinese economy. At the same time, the U.S. Department of Homeland Security expanded the entity list for the Uyghur Forced Labor Prevention Act and some members of Congress are focusing on ways to respond to Chinese coercion. U.S. government agencies have also expanded sanctions and export controls in Russia, expanded allowable defense exports to select countries, and have clarified that human rights violations can lead to export restrictions. Details on these issues and more can be found below.

U.S. Secretary of State Visits China

On June 19, U.S. Secretary of State Anthony Blinken met with Chinese President Xi Jinping in Beijing, the first by a U.S. Secretary of State since 2018. According to media reports, the United States and China had substantive discussions on key issues, including China’s actions against U.S. firms and China’s intelligence activities in Cuba. Although there were no breakthroughs between the two countries, both the U.S. and China agreed on the importance of keeping open lines of communication moving forward. For more information, click here.

U.S. Considering Ways to Respond to Chinese Coercion

U.S. policymakers are expressing increasing concern about China’s utilization of economic coercion and appear to be in the process of formulating potential responses. A recent report from the Congressional Research Service outlines the kinds of measures Beijing is employing, the effects they are having, and what the U.S. and others could do in response.

According to the report, the Chinese government tightly controls access to capital, trade, investment, technology, and research opportunities, which, in turn, allows it to calibrate incentives that can be offered and retracted to create pressure on foreign firms, governments, and other actors to adhere to China’s commercial and political demands. Coercion involves both the offer and withdrawal of access to the Chinese market, the application of commercial pressures to achieve certain outcomes, and the use of other economic levers that China controls, such as the approval of global merger and acquisition deals, to pressure or incentivize certain behavior.

These and other efforts were discussed in a recent hearing before the House Rules Committee. Legislation granting the president specific authorities to support trade partners facing economic coercion, including tariff increases and decreases, was introduced in the House and Senate earlier this year. For more information, click here.

Increased Enforcement of Chinese Forced Labor

The Uyghur Forced Labor Prevention Act establishes a rebuttable presumption that goods made wholly or in part in China’s Xinjiang Uyghur Autonomous Region are made with forced labor and are therefore excluded from entry into the United States. All businesses with products whose supply chains include Chinese materials should understand both U.S. Customs and Border Protection’s importer guidance and the related enforcement strategy and ensure that they are being implemented into their business operations. Even companies not importing directly from China may have goods detained if the materials used to produce those goods in a second country are tied at any level to the XUAR or specific entities or commodities associated with forced labor in China.

Of the 3,588 total shipments stopped since CBP began enforcing the UFLPA, 1,323 (37 percent) have been released, 490 (14 percent) have been denied, and 1,778 (50 percent) are still pending. Those figures are 24 percent, 8 percent, and 67 percent for the second quarter of FY 2023. Virginia companies importing goods, especially electronics (the sector that has had the most stopped shipments), need to take safeguards to ensure that those products were not made in the XUAR.

Importers should also avoid working with businesses listed on the Department of Homeland Security’s UFLPA Entity List, which recently added two entities and eight subsidiaries for working with the XUAR government to recruit, transport, transfer, harbor or receive forced labor or Uyghurs, Kazakhs, Kyrgyz, or members of other persecuted groups out of that region.

For more information, click here and here.

U.S. Pursues Friendshoring, Not Decoupling from China, Yellen Says

The U.S. has no interest in economic decoupling from China but is seeking to reduce its over-reliance on supply chains involving that country through the emerging policy of friendshoring, according to Treasury Secretary Janet Yellen. In a major speech on the U.S.-China economic relationship, Yellen said that relationship “is clearly at a tense moment.” She appeared to attribute this situation largely to the actions of Beijing, including its movement away from market reforms toward a more state-driven approach that includes expanding government support in both traditional sectors and emerging technologies; the more confrontational approach it is taking toward the U.S. and others, including increasing instances of economic coercion and retaliation; its ongoing human rights abuses of ethnic minorities within its borders; and its “no limits” partnership and support for Russia in its war with Ukraine. For more information, click here.

Export Controls and Sanctions on Russia

The Bureau of Industry and Security announced May 19 a final rule that builds on the substantial export controls already in place on a variety of inputs for Russia’s industrial and commercial, chemical and biological, and other sectors by making the existing Russian and Belarusian Industry Sector Sanctions stronger, more effective, and easier to understand and comply with. The rule specifically controls exports of all remaining six-digit HTS numbers under Chapters 84, 85, and 90. BIS also added 71 new entities to the Entity List and published a supplemental joint alert with the Financial Crimes Enforcement Network that provides financial institutions additional information with respect to new BIS export controls relating to Russia, among other things.

Virginia companies exporting goods to Russia should take the appropriate measures to comply with the new BIS rule. For more information, click here.

AGOA Tariff Preference Eligibility Under Review

Importers and others have until July 7 to seek changes in the eligibility of sub-Saharan African countries to receive benefits under the African Growth and Opportunity Act. Countries eligible for AGOA can receive duty-free treatment for certain additional products not included in the Generalized System of Preferences, as well as preferential treatment for certain textile and apparel articles. Public comments will be considered in developing recommendations on AGOA country eligibility for 2024. 

For 2023 the following have been designated as beneficiary SSA countries: Angola, Benin, Botswana, Cabo Verde, Central African Republic, Chad, Comoros, Cote d’Ivoire, Democratic Republic of Congo, Djibouti, Eswatini (formerly Swaziland), Gabon, Gambia, Ghana, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Niger, Nigeria, Republic of Congo, Rwanda, Sao Tome & Principe, Senegal, Sierra Leone, South Africa, Tanzania, Togo, Uganda, and Zambia.

The following are not currently designated as beneficiary SSA countries: Burkina Faso (terminated Jan. 1, 2023, for rule of law issues), Burundi (political violence), Cameroon (human rights), Equatorial Guinea (graduated from GSP based on income levels), Eritrea (human rights), Ethiopia (human rights), Guinea (human rights), Mali (human rights), Mauritania (worker rights), Seychelles (graduated from GSP based on income levels), Somalia (never eligible; requested benefits for the first time this year), South Sudan (political violence), Sudan (has not requested designation), and Zimbabwe (never eligible).

Virginia companies that currently conduct business in AGOA eligible countries or those that wish to do so, should consider submitting comments. For more information, click here.

U.S. Expands Allowable Defense Exports to Three Partners

The State Department has issued a final rule that, effective May 12, expanded the types of defense articles that may be exported and defense services that may be furnished to Canada, Australia, and the United Kingdom without a license. State notes that these changes are intended to ensure that the export control exemptions for these countries continue to enhance operational capabilities, interoperability, and cooperation between the armed forces of the U.S. and its partners.

Note that that this change may make it easier for Virginia companies exporting defense articles or defense services to sell to these three countries. For more information, click here.

Export Restrictions May be Imposed for Human Rights Violations

The Bureau of Industry and Security has issued a final rule confirming its policy that human rights violations can be a reason to add entities to the Entity List. BIS states that a 2022 decision by a U.S. appellate court affirmed its authority to add parties to the Entity List for human rights-related reasons and notes congressional support for such action as far back as 1979.

In accordance with this policy, effective March 28 this rule added five entities in China, three in Burma, two in Russia, and one in Nicaragua to the Entity List for related reasons, including (1) selling and servicing military equipment that allows Burma’s military regime to carry out human rights abuses, (2) complicity in, or direct or indirect engagement in, serious human rights abuses in Nicaragua, and (3) involvement in human rights violations and abuses in China.

For Virginia companies that are exporting products potentially subject to export licenses or other restrictions, it is important to have a system in place to verify that the entities to which you export are not restricted. For more information, click here.

Section 232 Tariffs Survive Again

The imposition of import tariffs on national security grounds got further support recently when the Supreme Court declined to hear a case challenging Section 232 tariffs on imports of steel products. The decision leaves intact a summer 2022 decision by the Court of Appeals for the Federal Circuit, which largely upheld a February 2021 ruling by the Court of International Trade, and means that the 25 percent Section 232 tariffs remain in place for any Virginia traders importing these products, including Virginia producers that use imported steel or aluminum.

After the Trump administration levied the Section 232 tariffs on steel in 2018 the courts have largely upheld them in a variety of challenges. In July 2021 the CAFC confirmed a presidential decision to double the steel tariffs on imports from Turkey, a ruling now final after the Supreme Court opted not to hear that case either. Earlier this year the CAFC ruled in favor of the extension of the Section 232 tariffs to steel derivatives. In March 2019 the courts rejected an argument that Section 232’s delegation to the president of Congress’ authority to impose tariffs and regulate foreign commerce was unconstitutional. For more information, click here.

Legislation Could Lead to Carbon Tariffs

Senators Chris Coons, D-Del., and Kevin Cramer, R-N.D., recently introduced the Providing Reliable, Objective, Verifiable, Emissions Intensity and Transparency (PROVE IT) Act, which would commission the Department of Energy to study the carbon intensity of specific products for both the United States and select countries over two years. The products studied would include 22 categories of the U.S. Harmonized Tariff Schedule, including aluminum and iron, fossil fuels such as crude oil and natural gas, critical minerals such as copper and cobalt, uranium products, refined petroleum products, and clean technology products such as solar panels and wind turbines.

Proponents of the legislation state that it is a necessary step toward a carbon border adjustment mechanism, which would impose tariffs on carbon-intensive imports. The European Union has already developed its own CBAM, which goes into a transitional and limited phase Oct. 1 and will be fully implemented Jan. 1, 2026.

Absent a U.S.-equivalent to the European Union’s CBAM, Virginia exporters will likely be subject to additional tariffs when exporting to the European Union. For more information, click here.

Legislation Impacting De Minimis Imports

Members of Congress have recently introduced several legislative bills that would have substantial impacts on de minimis imports. For example, the De Minimis Reciprocity Act (S. 1969, introduced June 14 by Sens. Cassidy, R-La., and Baldwin, D-Wis.) would (1) ban de minimis imports from “untrustworthy countries,” (2) reduce the de minimis threshold for duty-free imports to an amount that matches the one U.S. trading partners use, (3) allow only express carriers to facilitate de minimis imports into the U.S. (to better help stop counterfeits and fentanyl), (4) require more information on every package entering the U.S., and (5) use the revenue proceeds to establish a fund for reshoring industry from China.

The Import Security and Fairness Act (S. 2004, introduced June 15 by Sens. Brown, D-Ohio, and Rubio, R-Fla.; and H.R. 4148, introduced June 15 by Reps. Blumenauer, D-Ore., and Dunn, R-Fla.) would (1) prohibit goods from non-market economies that are on the Priority Watch List from benefitting from de minimis treatment, (2) prohibit importers that have been suspended or debarred from being able to use de minimis treatment, and (3) require U.S. Customs and Border Protection to collect more information on de minimis shipments.

Virginia companies that are importing under de minimis levels from specific countries could be impacted by these legislative bills if passed into law. For more information, click here.

Special Topic: Enforcing USMCA Provisions

The US-Mexico-Canada Agreement includes a novel tool – the facility-specific rapid response mechanism – to monitor and ensure compliance with the USMCA’s labor provisions. The RRM is used to address labor violations, such as those impacting freedom of association and collective bargaining, at the factory level in real time.

In the United States, once stakeholders file a petition the U.S. government has 30 days to decide whether to investigate the complaint. If it does, the investigation is designed to take no longer than 148 days. If an investigation finds a facility to be in violation of USMCA labor provisions, the U.S. can suspend USMCA tariff benefits or impose other penalties, such as denying entry of goods from businesses that are repeat offenders.

As of June 20, there had been 12 cases filed under the RRM involving the following facilities, all of which are in Mexico. The U.S. has yet to invoke the RRM with respect to any Canadian facilities.

  1. General Motors facility in Silao
  2. Tridonex S. de R.L. de C.V. facility in Matamoros
  3. Panasonic Automotive Systems de Mexico S.A. de C.V. facility in Reynosa
  4. Teksid Hierro de Mexico, S.A. de C.V. facility in Frontera
  5. Manufacturas VU facility in Piedras Negras (VU I)
  6. Saint Gobain facility in Cuautla
  1. Manufacturas VU facility in Piedras Negras (VU II)
  2. Unique Fabricating facility in Santiago de Querétaro
  3. Goodyear SLP facility in San Luis Potosi
  4. Draxton facility in Irapuato
  5. Industrias del Interior facility in Aguascalientes
  6. Grupo México San Martin mine in Zacatecas

The number of cases has escalated quickly, with two new cases filed over the last four weeks. On June 12, U.S. government officials asked Mexico to investigate whether a denim garment factory in Aguascalientes had coerced workers into accepting its proposed collective bargaining agreement revisions, intervened in the internal affairs of the union representing workers at the facility, and failed to bargain in good faith with that union. The U.S. subsequently invoked the RRM at this facility, marking the first time it used this tool in the garment sector.

On June 16, the U.S. government asked Mexico to investigate labor violations at a mine in Zacatecas. The petition was filed by two U.S. labor organizations, the AFL-CIO and the United Steelworkers, as well as a Mexican union, Los Mineros.

The U.S. is working to enforce other USMCA provisions as well. For example, it requested formal dispute settlement consultations earlier this month regarding a February 2023 Mexican decree that bans the use of genetically-engineered corn in tortillas or dough and instructs Mexican government agencies to gradually substitute (i.e., ban) the use of such corn in all products for human consumption and animal feed. The consultations also concern Mexico’s rejections of applications for authorization for the importation and sale of certain biotechnology products.

“The United States has repeatedly conveyed its concerns that Mexico’s biotechnology policies are not based on science and threaten to disrupt U.S. exports to Mexico to the detriment of agricultural producers, which in turn can exacerbate food security challenges,” said U.S. Trade Representative Katherine Tai, referencing numerous discussions held over the past few years. “Mexico’s biotechnology policies also stifle agricultural innovation that helps American farmers respond to pressing climate challenges, increase farm productivity, and improve farmers’ livelihoods.”

If the two sides fail to reach an agreement during consultations, the U.S. could request the establishment of a USMCA dispute settlement panel to hear its arguments. That process, if it resulted in a ruling in favor of the U.S., could eventually result in retaliatory measures such as increased tariffs on imports from Mexico.

Overall, the U.S. has been active in enforcing key provisions in the USMCA, utilizing both traditional dispute settlement mechanisms and the newer rapid response mechanism. The RRM makes it relatively easy for petitioners to file complaints and begin enforcement proceedings, thereby creating a level of unpredictability for companies in Mexico.