Customs And International
Trade Bar Association
|
|
May 3, 2022 (4:00 PM - 7:00 PM EDT): CITBA Annual Meeting
The Annual Meeting of the Customs and International Trade Bar Association will take place at 6 pm on Tuesday, May 3, 2022 at the Washington, DC office of Akin Gump Strauss Hauer & Feld LLP and by videoconference. At the meeting, CITBA will elect its new Board of Directors and Officers based upon the Report of the Nominating Committee. All members of the association are invited to participate. Members who cannot be present may vote by use of the proxy form.
Members and students: $25
Non-members: $50
This is our first in-person event since the pandemic, so we hope you will join us in person. If you are unable to do so, you can register to attend via Zoom at no charge and will receive the link in the confirmation.
The annual meeting will be preceded by presentations from Lisa Wang, Assistant Secretary of Commerce for Enforcement and Compliance, and Lisa Barton, Secretary of the International Trade Commission. We will also be joined by a panel of government and private sector lawyers to talk about the trade implications of the crisis in Ukraine. We will then conduct a short meeting, starting at approximately 6 pm, to hear from some of our current Board members and elect our new Board and Officers. A reception will follow to celebrate and get reacquainted face to face.
|
For information on registration and the latest on CITBA events, please visit our website. |
January 27, 2022 - A Trade Odyssey: Exploring Commerce’s Amended Regulations To Improve AD/CVD Enforcement
CITBA hosted a discussion concerning key aspects of the U.S. Department of Commerce’s amended regulations to improve the administration and enforcement of AD/CVD laws – the most significant changes to the AD/CVD regulations since modifications in 1997-98 to implement the Uruguay Round Agreements Act.
|
NEWS FROM THE CLERK OF THE COURT OF INTERNATIONAL TRADE
By Stephen Swindell and Scott Warner*
*Stephen Swindell is the Supervisor and Scott Warner is the Operations Manager for
Case Management at the Court of International Trade.
|
Totally YouTubular
In its efforts to make proceedings more accessible to the Bar and the public, the Court has joined an Audio Streaming Pilot Program authorized by the Judicial Conference of the United States. This program is designed to evaluate the feasibility of livestreaming audio of select civil proceedings on court-specific YouTube channels. The Court’s first livestreamed proceeding was the three-judge panel oral argument in Ct # 21-00052 In Re Section 301 Cases that took place on February 1, 2022. Thanks to this program and all involved, over 400 members of the public listened to the proceeding through the Court’s YouTube channel. Be sure to check out the Court’s website for more information and future proceedings.
Proposing, Posting, and Comment Periods: The Latest in Rule Amendments
Please stay tuned to the Court’s website for the posting for comment of proposed amendments to Rule 58, Rule 81, Form 21 and Standard Chambers Procedures. These revisions seek to make CIT Rule 58 and FRCP 58 identical, conform Form 21 accordingly, and to require that documents filed on CM/ECF be made text-searchable to the maximum extent possible.
Jumpin’ Judicial Conferences!
The 21st Judicial Conference of the United States Court of International Trade will be held on Thursday October 27, 2022 in Washington, D.C. at The Mayflower Hotel. We encourage you to make your room reservations sooner rather than later, especially if you want to get the discounted rate of $188/night! We look forward to seeing you!
|
|
|
* Many thanks to Lydia Pardini, Tebsy Paul, and John Peterson for their contributions to this update.
|
|
¡Customs Corner!
DON’T MISS IT! The U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) will be hearing oral argument on APRIL 6, 2022, in the Meyer Corp. v. United States case. As you may recall, on November 9, 2021, the CITBA Customs Committee hosted a panel discussion on first sale versus last sale under the U.S. and Canadian customs regimes. The panelists Mr. William Baldwin discussed the CIT’s 2021 decision in that case. That decision was appealed to the Federal Circuit and you can listen to the oral argument on April 6, 2022, in either real time or a recording at a later date: Listen to Oral Arguments - U.S. Court of Appeals for the Federal Circuit (uscourts.gov).
WOULD YOU LIKE TO JOIN THE CUSTOMS COMMITTEE? The Customs Committee is open to any CITBA Member who would like to join! We meet quarterly (July, October, January, & April) around lunch time to give us all a chance to stay in the “know” on current customs events. Each meeting starts with a short informal presentation giving us a “heads-up” about interesting current customs matters. We will then open the meeting for discussion, questions, or anything else that occurs organically. We hope you will join us! If you would like to join and receive updates regarding meeting times and logistics, please make sure to “join” the Customs Committee through the CITBA.org website. All meeting details and links will be communicated through the website platform.
OUR NEXT MEETING will be April 20, 2022, at 12:30.
|
|
Spring 2022 Export Control Recap
By the CITBA Export Control Committee
|
|
Welcome to what is, optimistically, the CITBA Export Control Committee’s inaugural annual recap of major developments in export controls. 2021 ushered in a new presidential administration, but all signs point to continuity in the export control space. If an overall theme can be distilled, it is that the new administration will likely dole out new export controls more methodically than its predecessor, but that it is unlikely to scale back any of the existing controls in the near term.
President Biden’s Export Control Nominees
On March 31, 2022, the Senate at long last confirmed President Biden’s nominee for Undersecretary of Commerce for Industry and Security, Alan F. Estevez, by voice vote. Mr. Estevez comes from Deloitte, where he worked as a national security and logistics consultant. He previously enjoyed a long career in the Department of Defense, beginning in 1981 and culminating in his position as Assistant Secretary for Logistics and Materiel Readiness and later Deputy Undersecretary for Acquisition, Technology and Logistics during the Obama Administration. In our prior update, we noted that Mr. Estevez faced hurdles from Senator Tom Cotton (R-AR) involving concerns over toughness on China and Senator Robert Menendez (D-NJ) involving concerns over the export control status of certain firearms that were transferred from ITAR to the EAR by the Trump Administration.
With Mr. Estevez’s confirmation, and the Senate’s prior confirmation of Assistant Secretary Thea D. Rozman Kendler on December 14, 2021, the Senate has at long last confirmed permanent leadership for BIS, which for a long time operated under acting leadership.
Entity List Updates
February 14, 2022 – BIS added 7 entities located in China, Pakistan, and the United Arab Emirates to the Entity List for allegedly providing US technology in furtherance of prohibited nuclear activities or to North Korea.
March 3, 2022 – BIS moved 45 entities located in Russia from the Military End User list to the Entity List and made those entities subject to new Footnote 3 to the Entity List, which identifies entities subject to the new Russian military end user foreign direct product rule (described below). BIS also added two additional entities located in Russia to the Entity List.
March 9, 2022 – BIS added 81 entities located in Russia, and an additional 10 entities located in Belize, Estonia, Kazakhstan, Latvia, Malta, Singapore, Slovakia, Spain, and United Kingdom to the Entity List, for allegedly providing support to Russia’s security and defense sectors, in response to Russia’s invasion of Ukraine.
April 7, 2022 – BIS added 120 entities located in Belarus and Russia to the Entity List for allegedly providing support to Belarus and Russia’s security and defense sectors, in response to those countries’ invasion of Ukraine. Of those entities, 95 were deemed by BIS to be Belarusian or Russian military end users subject to Footnote 3 to the Entity List.
Russia and Belarus Updates
In addition to the Entity List designations described above, BIS announced a number of measures aimed at Russia and Belarus in response to those countries’ invasion of Ukraine.
On February 24, 2022, in conjunction with a sweeping round of sanctions imposed on Russia and Russian individuals and entities by OFAC, BIS imposed several new export controls on Russia:
- The most sweeping of these was a new license requirement for all exports to Russia subject to the EAR and specified in Categories 3, 4, 5, 6, 7, 8, and 9 of the CCL. This includes all such items controlled only for anti-terrorism reasons or other reasons for control that are not generally applicable to exports to Russia.
- BIS expanded the existing Russia military end use and end user controls to all items subject to the EAR except (1) food and medicine classified as EAR99, and (2) encryption items classified under ECCN 5A992.c and 5D992.c, so long as not destined for a Russian government or government-controlled end user.
- BIS created two new foreign direct product (“FDP”) rules applicable to Russia. The first imposes a licensing requirement applicable to Russia for all foreign-produced items described on the CCL and which are the direct product of US-origin software or technology described in Categories 3, 4, 5, 6, 7, 8, or 9 of the CCL. The second imposes a licensing requirement applicable to certain Russian military end users for all foreign-produced items described on the CCL and which are the direct product of US-origin software or technology described in the CCL.
- BIS also added Russia to Country Group D:5, and limited the applicability of license exceptions for exports, reexports or in-country transfers to or within Russia.
On March 2, 2022, BIS extended all the export controls listed above to Belarus and Belarusian military end users, due to that country’s active support of, and participation in, Russia’s invasion of Ukraine.
On March 3, 2022, BIS expanded the scope of export controls targeted at the Russian oil and gas industry sector by adding a new general prohibition that will apply to certain items used for refining oil. The rule prohibits, without a license, all exports, reexports, and transfers (in-country) to or within Russia of these items, in contrast to the existing Russia industry sector controls which only prohibit activity when the exporter or transferor has “knowledge” that the item is intended for the Russian oil and gas sector. The items subject to the new prohibition are described in new Supplement No. 4 to EAR Part 746.
On March 11, 2022, BIS issued restrictions on the export, reexport, or in-country transfer of luxury goods to Russia and Belarus as well as worldwide if the end users are Russian and Belarusian SDNs designated by OFAC under certain Russia or Ukraine-related Executive Orders. The restrictions are reflected in new § 746.10 of the EAR. The list of luxury goods subject to this export ban—which includes certain spirits, tobacco products, clothing items, diamonds, vehicles, and antique goods—along with their Schedule B codes and descriptions are included in the new Supplement No. 5 to EAR Part 746.
Clarification of the EAR’s Restrictions on Foreign Produced Items
On February 3, 2022, BIS amended the EAR to clarify the manner in which foreign direct products of controlled US items may be subject to export controls. The amendments were not intended to substantively change the application of the EAR’s FDP restrictions.
Pursuant to the amendments, BIS established four separate FDP rules:
- National Security FDP Rule, which applies to items on the Wassenaar Arrangement’s dual-use list, which generally coincides with items subject to NS controls on the CCL.
- 9x515 FDP Rule, which applies to specific foreign-produced commercial satellite- and space-related items described in 9x515 ECCNs on the CLL.
- 600 Series FDP Rule, which applies to specific foreign-produced military items described in 600 series ECCNs on the CCL.
- Entity List FDP Rule, which applies to entities subject to Footnote 1 of the Entity List, which was created in conjunction with export controls on Huawei.
The subdivision of the FDP rule in § 734.9 of the EAR makes it easier to refer to the controls applicable to a specific foreign direct product. It also suggests that BIS is open to creating further targeted export controls on foreign direct products of US technology and software. For example, the fact that what many export control practitioners had taken to calling the “Huawei-specific FDP rule” is now officially designated as the “Entity List FDP Rule” suggests that BIS may seek to apply it to other entities added to the Entity List.
Indeed, as noted above, BIS later created two new FDP rules (one general and one based on the Entity List) as part of its response to Russia’s invasion of Ukraine. That brings the current FDP rule tally to six.
|
|
Federal Circuit and CIT Case Summaries |
|
Please enjoy brief summaries of key US CAFC and CIT case decisions from the past quarter. CITBA thanks Nithya Nagarajan, Julia Banegas, and Isabella Peek in Husch Blackwell LLP's Washington D.C. office, and Lydia Pardini, Associate at Adduci, Mastriani & Schaumberg LLP, for putting these together and sharing them. |
|
U.S. Cancels Russia: New Import Bans, Export Controls, and Sanctions on Russia, Belarus, and Areas of Ukraine |
By Harold Jackson, Braumiller Law Group |
In response to Russia’s continued invasion of Ukraine, the U.S and its allies have imposed several layers of economic sanctions and actions against Russia and Belarus. In addition to decimating the Ruble to a value of less than $0.01 (USD), the prohibitive actions by the U.S. and its trading partners have left global supply chain participants in a mire of new requirements. This article touches on each of the economic actions by the U.S. government in response to Russia’s invasion of Ukraine.
New Export Controls and Rules Under the EAR
The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) published new export controls related to transfers to Russia, Belarus, and Russian/Belarusian entities.
A) New Commerce Control List (“CCL”)-based license requirements for Russia.
A license is required to export, reexport, or transfer certain items subject to the EAR (Export Administration Regulations) (i.e., goods from the U.S.) and classified under Categories 3, 4, 5, 6, 7, 8, or 9 of the Commerce Control List to Russia.
B) Review policy of denial to license applications for exports to, reexports to, or transfers within Russia
The new rules implement a review policy of denial for new licenses for exports to Russia. This means that, when a company applies to BIS for a license to export items to Russia, BIS is instructed to deny the application unless there are extreme, rare, and extenuating circumstances. Those circumstances must include exports that involve items that ensure safety of flight, maritime safety, meet humanitarian needs, enable government space cooperation, and allow transactions for items destined to specified Western subsidiaries and joint ventures, support civil telecommunications infrastructure in certain countries, or government-to-government activities.
C) Military End Use / User Controls
The BIS rule prohibits exports of all items subject to the EAR (even those classified as EAR99) if, at the time of the export, reexport, or transfer (in-country), the person has knowledge that the item is intended for a military end use or military end user in Russia. Prior to the new rule, only a handful of specifically identified ECCNs were prohibited. These new rules designate many additional foreign-produced items as subject to the EAR.
D) Addition of two new Foreign Direct Products Rules specific to Russia and Russian Military End Users
A license is required from BIS to export a foreign-produced item that is the “direct product” of U.S.-origin “technology” or “software” provided for in any ECCN in product groups D or E in certain Categories of the Commerce Control List, if that item is going to Russia, Belarus, or the entities listed on the military end users listed. A foreign-produced item meets the scope of the rules if there is knowledge that the foreign-produced item is destined for Russia, or will be incorporated into, or used in the production or development of any part, component, or equipment produced in or destined to Russia.
E) Additional Controls related to Russia’s Oil & Gas Industry
A license is now required to export certain oilfield equipment classified under Chapters 84 and 85 of the Harmonized Tariff Schedule. The list of items can be found in Supplement No. 4 to Part 746 of the EAR.
F) Additional 140 Entities added to the BIS Entity List
BIS added a total of 140 entities to the Entity List under Supplement No. 4 to Part 744 of the EAR. Most of these entities are located in Russia or Belarus, but there are a few entities located throughout Europe and Asia.
Import Restrictions of Certain Russian-Origin Products
The U.S. banned the importation of several categories of products Russia, including oil, gas, petroleum, and coal products, fish, seafood, alcohol, and diamonds.
A) Oil, Gas, Petroleum, and Coal Products
Executive Order 14066 prohibits the importation of crude oil, petroleum, petroleum fuels, oils, and products of their distillation, liquefied natural gas, coal, and coal products into the U.S. from Russia. OFAC published General License 16 that allows companies to continue to purchase these energy-related products from Russia if the products are ordered prior to April 22, 2022. In other words, under this license, companies can still place orders for these products until April 22, and can import those purchased products, even if those products enter the U.S. after April 22. To enter these types of products that were ordered before April 22, Customs & Border Protection (“CBP”) is requiring importers to submit a Form 241 with the dated purchase orders upon entry.
B) Other Prohibited Imports
In addition to the energy-related products above, the importation of fish, seafood, and preparations thereof, alcoholic beverages, and non-industrial diamonds is prohibited from Russia. See Executive Order 14068 and the related General License 17, which allows importation of these goods if they were ordered prior to March 11, 2022 and entered by March 25, 2022.
Economic Sanctions on Russian Financial Institutions
On February 24, 2022, the President issued Executive Order 14024, which resulted in several Directives by the Department of Treasury that banned transactions with most Russian financial institutions. In general, the Directives published by U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) prohibit U.S. persons and entities from engaging in certain transactions with the listed Russian banks and financial institutions, which make up over 80% of Russia’s financial sector. Directive 3 prohibits “new debt or new equity” of longer than 14 days maturity for transactions entered into after March 26, 2022, from Russia’s largest banks and lending institutions, which are listed in the Directive. Directive 4 prohibits all transactions involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation. For other restrictions on bonds, sovereign debt, payable-through accounts and other financial related restrictions for Russian entities, see Directive 1A and Directive 2 pursuant to E.O. 14024.
Other U.S. Actions and Prohibitions Related to Russian Activities
-
Addition of Vladimir Putin and other Russian oligarchs as restricted parties on the SDN (Specifically Designated Nationals) list.
-
Prohibitions of U.S. person’s ability to engage in new transactions in the so-called Donetsk People’s Republic (DNR) or Luhansk People’s Republic (LNR) regions of Ukraine, as well as importation or exportation of any goods, services, or technology from or to these areas, which amounts to an embargo of these territories.
-
Export prohibition of luxury goods Supplement No. 5 to Part 746 of the EAR that are subject to the EAR to any person located in the Russian Federation. The list of goods includes beer, cigarettes, cars, in addition to other products that are traditionally considered luxurious, such as clothes, leather products, and jewelry.
Conclusion
These U.S. trade restrictions are likely to stick around as Russia continues its invasion of Ukraine. Navigating these rules will require due diligence in reviewing a company’s downstream and upstream operations, including its customers and vendors, understanding the ins and outs of the current restrictions, and staying up to date on the latest restrictions as the situation in Ukraine unfolds. Specifically, companies whose operations are potentially subject to these rules should follow BIS, OFAC, and White House updates for news and developments. U.S. companies should reexamine their operations in Russia with these restrictions in mind as many key players are limiting or ending their business ties with Russia in compliance with these rules.
|
New CBP Prior Disclosure Requirements |
Co-authored by Jennifer Diaz and Sharath Patil*
*Jennifer Diaz is President of Diaz Trade Law based in Miami, FL. Sharath Patil is an Associate Attorney at Diaz Trade Law based in Washington, DC.
|
Introduction
Effective beginning November of 2021, U.S. Customs and Border Protection (CBP) updated its Prior Disclosure (or PD) extension request guidelines. The new requirements, which have not been circulated publicly, streamline but shorten the amount of time available for Prior Disclosure filers to perfect their disclosure. Previously, from our firm’s personal experience, CBP routinely granted requests for 180 days to perfect a Prior Disclosure, and if additional extensions were needed they were routinely granted. However, CBP has now significantly shortened extension periods to 30 days with only one additional 60-day extension granted (more details below). Due to the potentially large amount of work needed to perfect a Prior Disclosure, this shortening of the time to perfect makes the Prior Disclosure process more onerous for importers seeking to proactively disclose their suspected violations. Even worse, the limitation of time to perfect a disclosure opens up the possibility that an importer may disclose a violation to CBP, not have the opportunity to perfect the disclosure, and lose the benefits of the PD protection, allowing CBP the ability to penalize the importer. This article provides a background on CBP prior disclosures, explains the new requirements, and identifies best practices.
Background on Prior Disclosures
If a company or individual believes it has violated the law by making a material false statement in connection with their importations, and it is before CBP has commenced a formal investigation, proactively and voluntarily disclosing the potential wrongdoing can substantially reduce penalties.
CBP is chiefly responsible for enforcing 19 U.S.C. § 1592, a statute under which CBP can assess monetary penalties against persons who make material false statements, acts, or omissions in connection with their importations. “Person” includes importers, exporters, agents, manufacturers, and consignors. Aiding or abetting any person committing such act or making such an omission is a violation of the CBP statute. The statute, 19 U.S.C. § 1592, provides CBP the ability to enforce penalties upon persons that do not provide accurate information pertaining to their imports.
Common examples of false statements, acts, or omissions pertaining to imports include:
- Under- or over-valuation
- Misdescription of merchandise
- Misclassification under the Harmonized Tariff Schedule of the United States (HTSUS)
- Evasion of an antidumping or countervailing (AD/CVD) duty order
- Improper country of origin markings
- Improper claims for preferential treatment under a free trade agreement or other duty preference program
A PD is often submitted in two components: (1) a “blanket” PD, and (2) a “perfected” PD. If you have identified a potential violation that CBP has not begun to formally investigate and you wish to benefit from the PD process, filing an initial blanket submission (orally or in writing) is the first step. You can begin this process even you do not have all of the facts and details gathered.
Initial Submission
- Identify the class or kind of merchandise involved in the violation;
- Identify the importation or drawback claim included in the disclosure by entry number, drawback claim number, or by indicating each concerned Customs port of entry and the approximate dates of entry or dates of drawback claims;
- Specify the material false statements, omissions or acts including an explanation as to how and when they occurred; and
- Set forth, to the best of your knowledge, the true and accurate information or data that should have been provided in the entry or drawback claim documents.
CBP’s ICP on Prior Disclosures contains an invaluable checklist of all PD requirements in Appendix A.
Perfecting a Prior Disclosure
If you require additional time to gather information, you should state in your initial PD that you will require time to perfect your PD. According 19 CFR § 162.74(b)(4), you have 30 days to gather this information. The perfected PD should also describe:
- Identify the class or kind of merchandise involved in the violation;
- Identify the importation or drawback claim included in the disclosure by entry number, drawback claim number, or by indicating each concerned Customs port of entry and the approximate dates of entry or dates of drawback claims;
- Specify the material false statements, omissions or acts including an explanation as to how and when they occurred; and
- Set forth, to the best of your knowledge, the true and accurate information or data that should have been provided in the entry or drawback claim documents.
New CBP Prior Disclosure Policies
CBP Headquarters published a National Policy Directive, effective in November of 2021, establishing stricter requirements for the time allotted to perfect Prior Disclosures. Although the Directive is not available for public view at the time of this writing, under the new policy:
- Importers may verbally inform CBP of their intention to submit a Prior Disclosure and then have 10 days to submit an Initial Prior Disclosure in writing;
- Upon the filing of an Initial Prior Disclosure, Prior Disclosures must be perfected within 30 days;
- The deadline to submit a Perfected Prior Disclosure may be extended only once for a period of 60 days;
- Any additional time (allegedly only for extraordinary circumstances) may only be granted by the express consent of the Director of Field Operations.
Best Practices
Practice Tip: The best way to stay compliant is to ensure that violations do not occur in the first place. To proactively stay compliant, pre-compliance practices included in the Top 10 Tips When Importing are essential. Key tips are summarized below:
-
Keep records to show you used reasonable care – To ensure you are using reasonable care, confirm compliance with the reasonable care checklist.
-
Confirm use of the correct HTSUS classification – The HTSUS is the legally recognized mechanism for determining tariff classifications for goods being imported into the United States. If you are unsure how your product is classified, you may request a binding ruling from CBP.
-
Confirm use of the correct value for your product – When importing, accurately valuing your product and ensuring the payment of the correct corresponding duties is an important aspect of exercising reasonable care. Furthermore, from CBP’s perspective, ensuring that your imports are valued correctly is critical because doing so ensures that CBP is collecting the correct amount of duties and fees. Protecting revenue is a priority trade initiative for U.S. CBP. CBP’s premier guidance including all relevant binding rulings on valuation is CBP’s Valuation Encyclopedia.
-
Confirm you’re listing the correct Country of Origin (COO) – If you source products from multiple countries and are unsure about whether your product is substantially transformed in the last country of production, or unsure of which COO to mark your goods with, you may request a binding ruling from CBP.
Please Note: A Valid Prior Disclosure Does Not Protect You from Criminal Liability
If you submit a PD containing information that gives CBP reason to believe that a criminal violation has occurred, CBP and/or Homeland Security Investigations (HSI) is obligated to refer that information to the appropriate U.S. Attorney’s Office. The U.S. Attorney’s Office decides whether or not to prosecute the alleged criminal violation.
Conclusion
A Prior Disclosure is an invaluable tool for importers seeking to proactively comply with CBP import requirements. Filing Prior Disclosures can substantially reduce the likelihood of civil penalties and can at times reduce the likelihood of criminal enforcement. Nevertheless, the Prior Disclosure process can be involved and detail-oriented. The new CBP guidelines shortening the time period to perfect make the Prior Disclosure process more burdensome. For this reason, it is now more important than ever essential for importers to seek appropriate legal counsel and carefully work through the numerous requirements of the Prior Disclosure process.
|
How Will Sustainability Transform Supply Chain Data? |
Co-Authored by Andrew Stephens and Lily Baron*
*Andrew Stephens is a Senior Policy Advisor at the USDA Foreign Agricultural Service. Lily Baron is a Law Clerk at the U.S. Department of Commerce and a third-year law student at American University Washington College of Law
The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States Government or any agency thereof.
Sources available from the authors
|
New sustainability regulatory initiatives are establishing requirements for supply chains to collect additional data on a range of sustainability metrics including deforestation, labor conditions, carbon intensity, and recycled content. As one observer noted, “this proliferation of objectives is making value chain management enormously complex.”
The European Union (EU) may soon require geolocation identification of certain agricultural commodities to prevent deforestation. The EU is also proposing the creation of “digital product passports” for electric car batteries to prove conformity with sustainability requirements. These provisions, and others like them, are contained in myriad emerging sustainability initiatives expected to transform supply chain data—though implementing these new requirements may impose significant challenges to traders.
Many of these initiatives—which will require traders to trace their products through the product life cycle—appear to be aspirational. After all, what is a digital passport for an electric car battery? Will we really use Radio-Frequency Identification embedded in consumer goods to sort them in recycling centers? How do you trace cotton from the farm to the t-shirt? What data elements are needed to trace lettuce or beef from the field to the restaurant? How can you ensure a plastic bottle contains recycled content? These questions are just some of the many that arise when taking a closer look at the implications of these new initiatives.
While many technical challenges remain to implementing complex traceability requirements for varied global supply chains, these regulatory measures are gaining momentum. One pertinent example of an initiative with supply chain data requirement implications is the United Kingdom’s (UK) Environment Act 2021, which contains provisions on the import and use of certain forest commodities (FRCs), or products derived from FRCs, in commercial activities in the UK. Notably, the Act’s consultation period closed on March 11, 2022, finalizing a step toward the adoption of secondary regulations and the publication of further guidance on its implementation.
Another example is the EU’s proposal for a Deforestation-Free Products (DFP) Regulation, which seeks to ensure that certain commodities that are purchased, used, or consumed on the EU market are “deforestation-free.” The proposed list of commodities subject to these requirements includes soy, beef, palm oil, wood, cocoa, and coffee. Similarly, the EC’s Battery Regulation, proposed in 2020, will require due diligence to ensure key inputs such as cobalt do not have adverse social or environmental impacts.
The UK’s provisions on FRCs and the EU’s DFP Regulation and Battery Regulation all require regulated entities to obtain detailed information about the origins of the covered commodities, though the DFP Regulation’s information-gathering requirement is arguably the most comprehensive of the three. In addition to collecting information on the country of production of the commodities, to comply with the DFP Regulation entities must collect data on the geolocation coordinates of all plots of land on which the commodities were produced, supplier details, and adequate and verifiable information that the commodities have been produced in conformance with local law and are deforestation-free.
Additionally, the Battery Regulation will require by January 2026 that “each industrial battery and electric vehicle battery with a capacity higher than 2 kWh shall have an individual ‘battery passport’ linked to information about the characteristics of each battery type and model, providing valuable data to recyclers and second-life companies.”
The EU’s forthcoming Sustainable Products Initiative (SPI) will revise the current Ecodesign Directive with the aim towards making “the broadest possible range of products” placed on the EU market more sustainable. The SPI proposes “establishing EU rules for setting requirements on mandatory sustainability labelling and/or disclosure of information to market actors along value chains in the form of a digital product passport.”
The traceability requirements in these various regulations are generally a departure from traditional third-party certification schemes, which ensure products are sourced from sustainable supply chains based upon a chain of custody in which the primary mechanism is a written assurance that a product is in conformity with certain standards. Although there are various approaches, a chain-of-custody system generally includes measures that define responsibility for the care of materials and products as they exchange hands from one organization to the next within the relevant supply chain with the purpose of ensuring that the specified characteristics are indeed the same as those delivered in the final product. Chain-of-custody systems are therefore another model that could be utilized to demonstrate sustainability, but are distinct from the data-intensive mandatory traceability requirements under certain new initiatives like those addressed above.
Notably, blockchain technology is currently one of the leading methods companies use to demonstrate product-origins to consumers. By enabling all actors in a brand’s supply chain to record information about their activities in a single, chronological, and immutable way, companies are able to trace information about their products from the raw material stage all the way to final usage. Some experts predict that companies that invest in increased traceability and measurements of data along supply chains through blockchain will gain a competitive edge in the ever-increasing consumer demand and regulatory requirements.
In a perfect world, these new data requirements would be addressed by a harmonized system of data supported by inter-functional software and hardware. In the real world, the solutions that are emerging appear to be sector specific and diverse. One reason for this degree of novelty is that value chains are diverse and variable across industries. Consequently, some industry bodies have begun developing their own initiatives. For example, Together for Sustainability, a chemical-industry body, began developing rules for generating and sharing emissions data among its 34 members. However, industry-specific initiatives like this one remain siloed from parallel initiatives, which can lead to problems for companies spread across multiple sectors that in turn must meet various or conflicting criteria.
Differences in how companies make their calculations can also raise problems considering lack of uniformity can create wide disparity in numbers. For example, a supplier could have a relatively small carbon footprint but only because its analysis excluded certain activities, for example transport, that its rivals included in their calculations. Adding a further layer of difficulty is that many of the relevant terms included in these initiatives, such as “value chain,” “upstream,” and “downstream” are difficult to define as they are used for different meanings in different contexts in literature and by stakeholders from different industry sectors.
Additionally, the tracing and information requirements established by provisions like those under the UK Environmental Act 2021 and the EU’s proposed sustainability regulations will be particularly challenging for companies that have minimal visibility into the lower tiers of their supply chains. Knowledge gained from other traceability efforts suggests that this and many other challenges remain, particularly for the most stringent form of traceability known as “identity preserved” in which a specific article is traced back to the source of production. For example, the U.S. Food and Drug Administration (FDA) has worked to develop traceability systems for high-risk foods for more than a decade. A major pilot project funded by the FDA in 2020 resulted in six firms successfully tracing lettuce from the supermarket back to the farm, but only because the firms utilized data that was outside of the original data template for the project. This experience suggests there is a lot of learning still to be done, especially when it comes to tracing input materials through processed products, which would undoubtedly be even more challenging.
In addition to this current batch of sustainability initiatives, if the EU establishes a Carbon Border Adjustment Measure (CBAM), importers of carbon intensive products such as steel, cement, and fertilizer would be required prove the energy intensity of their products, which would likely necessitate tracing upstream (Scope 3) carbon emissions from their input suppliers, creating an entirely new set of supply chain data requirements. The authors of the Impact Assessment Report prepared by European Commission Staff for the CBAM proposal in July 2021 noted that there may not be a one-size-fits-all solution for ensuring that imports are properly reporting their associated carbon emissions:
Value chains are very different in the sectors covered by the EU [Emissions Trading System] and exposed to a risk of carbon leakage. The differences concern both the typical depth as well as the horizontal width of value chains. Therefore, it can be assumed that not all options of CBAM designs will be equally suitable for the different sectors.
Looking forward, one can expect that some regulations will continue to rely on traditional third-party certification schemes, while others will incorporate new technological solutions for traceability from the initial production of key inputs all the way to the consumer.
Having assurances that a product contains recycled inputs will be a key aspect for many of these new regulations—the CBAM Impact Assessment Report notes that if an importer declares their steel to be produced from recycled scrap, the resulting emissions and the financial obligations of the importer under the CBAM will be significantly less. Likewise, Canada recently sought public comments on how to verify that imported plastic contains recycled content. In some situations, products containing recycled inputs can be identified through laboratory analysis, while in other cases, lab tests may not be dispositive.
This revolution in supply chain data could also present important opportunities for customs and other cross border regulatory agencies to utilize these new data flows to enhance their risk profiles for imported products and facilitate trade. Recently published trade facilitation texts negotiated by USTR anticipate major changes in supply chain digitization. For example, Article 6 of the updated Protocol to the Agreement on Trade and Economic Cooperation (ATEC) between the United States and Brazil requires that “Each Party shall regularly update, as appropriate, risk profiles in its risk management systems, taking into account emerging trends and trade dynamics….”
An uptake in traceability initiatives and wider use of technologies will contribute to ensuring sustainability compliance moving forward, especially as these initiatives gain popularity and expand in scope. Already, some legal practitioners have surmised that the UK’s DFP Regulation will be broadened to cover other commodities in addition to forest products, such as food products and eventually mining and extractive commodities too. “At an EU level, the DFP Regulation explicitly suggests that the law is intended to be complementary to other human rights/environmental due diligence requirements and anticipates some harmonization in aspects of EU due diligence regimes including reporting requirements.”
Moving forward, it will be pertinent for traders to find opportunities to provide input on the proposed technical implementation of initiatives like the ones discussed in this article, to ensure that they are feasible and do not unduly burden trade. Although public comment periods are closed for some of the measures discussed above, such as the UK’s FRCs Regulation, there will almost certainly be more opportunities in the future for traders to share their experience.
|
|
Please look for further announcements and copies of past newsletters at: |
|
Not a CITBA member? Apply for membership now! CITBA offers different membership
levels - active, associate and retired/student.
We can also make it easy on you by issuing a single invoice for all the members of your practice group. Email Kristin Mowry at info@citba.org for details.
|
|
 |
DISCLAIMER: The CITBA Quarterly Electronic Newsletter is published as a free service for members of the Customs and International Trade Bar Association. The Newsletter is for general information only and is not legal advice for any purpose. Opinions reflected in the Featured Articles are solely those of the authors and do not reflect the position of CITBA, its members, the Board of Directors, or Sandler, Travis & Rosenberg, P.A. Neither CITBA and its officers and members nor Sandler, Travis & Rosenberg, P.A., assume liability for the accuracy of the information provided.
|
|
|
|
Our Address:
200 Little Falls Street, Suite 205
Falls Church, VA 22046
|
|
|
|
|
|
|
|
