By Susan Kohn Ross

Two actions took place at the end of last week which heighten concerns that a trade war with China could be ever more likely. First, there was the preliminary decision in the solar panels 201 case. Then, we had the additional sanctions imposed by the President on North Korea.

The 201 solar panel case began when Suniva Inc. and SolarWorld Americas Inc. filed their cases before the International Trade Commission (“ITC”) in April and May 2017. These actions are, of course, in addition to the antidumping and countervailing duties currently being imposed on these products from China.

Section 201 refers to a section in the Tariff Act of 1930, as amended, which appears in the law at 19 U.S.C. § 2252. What this provision does is allow an American company which contends it is being “significantly” harmed or threatened with “significant” harm by imports to seek provisional relief from the President. The ITC first conducts a hearing and receives written submissions/comments on the question of whether harm exists. Specifically, by a 4-0 vote, the ITC on September 22nd found that “increased imports of crystalline silicon photovoltaic cells (whether or not partially or fully assembled into other products) are being imported into the United States in such increased quantities as to be a substantial cause of serious injury to the domestic industry producing an article like or directly competitive with the imported article.”

In reaching its decision, the ITC found that solar cells from China were the main culprit, but also provided findings regarding various U.S. free trade agreement partners. Specifically, the ITC stated Mexico and Korea also accounted for a “substantial” share of the total imports and contributed “importantly” to the serious injury caused by imported products. There was a split about Canadian origin products. Regarding other FTA partners, their products were found not to be a “substantial” cause of serious injury or threat thereof.

The fact the ITC found harm will not surprise those familiar with U.S. trade remedies laws which are written with relatively low thresholds of proof and are designed to protect American industry, as is the case in most countries. What is less clear is the ultimate outcome of the case. The next step in the process is the remedies phase. The ITC has announced it will hold a public hearing on October 3, 2017 to receive testimony about what remedy/remedies should be imposed. Thereafter, the ITC will need to decide which option or combination of options it will recommend. The choices are to impose:

• an additional duty on the products;
• a tariff-rate quota;
• some other quantitative restriction on importation of the products;
• one or more appropriate adjustment measures; or
  any combination.

The ITC is to specify the type, amount and duration of the action recommended. The ITC has other options it may also recommend to the President, which consist of 1) initiating international negotiations to address the underlying cause of the increase in imports or otherwise alleviate the injury or threat; and 2) implementing any other action authorized under law that is likely to facilitate positive adjustment to import competition.

Once it has made its final determination, a report is issued to the President who makes the final decision. The ITC has committed to submit that final report no later than November 13, 2017. The President then may accept or reject the ITC’s recommendation.

The general press has been covering this story and consistently points out 201 remedies have not been imposed since 2001 and that occurrence was later overturned by the World Trade Organization as the WTO standard is different from that in U.S. law. The U.S. standard is “substantial cause” whereas the WTO standard is “unforeseen developments”. The WTO standard is articulated in the General Agreement on Tariffs and Trade, which predates the WTO Agreement on Safeguards.

Given the oft-repeated disdain of the Trump Administration for the WTO, and especially considering current American attempts to realign the composition of the WTO Appellate Body, popular thinking is the Trump Administration will not be concerned about subsequent WTO action. Rather, the solar panel decision is seen by many as a means for Mr. Trump to signal his support for American manufacturing by imposing some remedy on foreign made solar panels, especially those from China and possibly also Korea and Mexico. The popular consensus is the remedy the ITC will select is a large penalty, meaning a high percentage on the value of each shipment. Given that the antidumping and/or countervailing duty rates imposed on China origin goods often runs at 200%+, such a large number is not considered out of the realm of possibility. However, until we see the ITC’s report, all of this is conjecture. So, this action alone still falls in the wait and see category.

An interesting side note is that Korea stands a chance of having a penalty imposed on its solar panels. When taken in combination with the Trump Administration comments about renegotiating the Korea-U.S. Free Trade Agreement (“KORUS”), one is left to wonder about the impact of these action on the U.S. relationship with South Korea as well, especially given the bellicose nature of the North Korean nuclear efforts, and that leads to the other decision announced last week – new sanctions on North Korea.

On September 21, 2017, President Trump issued an Executive Order (yet to be numbered) (“EO”) imposing additional sanctions on North Korea. The general press has quoted Treasury Secretary Mnuchin as stating: “Foreign financial institutions are now on notice that going forward they can choose to do business with the United States or North Korea, but not both”.
The new Executive Order is broadly worded to include any person who is determined:

1. to operate in the construction, energy, financial services, fishing, information technology, manufacturing, medical, mining, textiles, or transportation industries in North Korea;
2. to own, control, or operate any port in North Korea, including any seaport, airport, or land port of entry;
3. to have engaged in at least one significant importation from or exportation to North Korea of any goods, services, or technology;
4. to be a North Korean person, including a North Korean person that has engaged in commercial activity that generates revenue for the Government of North Korea or the Workers’ Party of Korea;
5. to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this order; or
6. to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order.

The text as written is obviously intended to allow the Trump Administration as much flexibility as possible, but it does raise possibly serious concerns for American companies. Note in particular the use of the undefined word “significant”, when it comes to an import from or export to North Korea. Similarly, there is the use of the undefined word “materially” when it comes to assisting, sponsoring or providing financial, material or technological support for goods or services involving North Korea. It is often the case that U.S. government authorities have information on which they rely which is not known to the private sector and could yield seized goods, seized funds and/or penalties, despite the private sector conducting what it would consider as proper due diligence, and this is where relations with China are impacted and, equally importantly, the due diligence programs implemented by companies. In last month’s Alert, we discussed the impact of H.R. 3364, the “Countering America’s Adversaries Through Sanctions Act”. In that publication, we made the point:

The latest round of sanctions now demands that American companies seek many more details from their Chinese buyers and sellers. The key is clearly understanding both who owns the party with whom you are dealing, but also who are that party’s customers/suppliers …

While that requirement remains, it is now doubly important that financial institutions make sure they know with whom they are dealing, and businesses, too. Financial institutions already are subject to “know your customer” rules under the Patriot Act and other laws and regulations. This new EO is likely going to lead to many more questions from financial institutions before agreeing to fund letters of credit, otherwise accept funds from foreign parties or transmit funds payable to foreign parties.

The elephant in the room is how are Chinese banks going to respond. It is common knowledge that China is North Korea’s main trading partner. Rumors abound that China has already told its central bank to stop dealing with North Korea, but that does not help American institutions or traders. They will still need greater visibility into the supply chain, i.e., the real parties in interest in a given transaction. The new EO is described as “forward looking” meaning it will be imposed on deals after it became effective on Friday, the 22nd. However, that still means traders should be asking more questions, as well as financial institutions. Given the rules are different in other countries, how likely is it that Chinese suppliers are going to willingly admit they are using North Korean inputs? How likely is it Chinese buyers are going to freely admit they are taking American content and putting it into products sold/traded/bartered to/with North Korea? Without accurate relationship details, goods could be seized, funds frozen and penalties imposed. And those accurate details are not likely to come without Chinese government cooperation, which trickles down to its domestic trading community.

A real test of the international trading system is upon us and how the Chinese respond to the EO will be telling sign of whether we are facing the beginnings of a trade war with China, or whether China has the same goal as the U.S., at least when it comes to North Korea, and, therefore, encourages its business community to freely provide needed details so that due diligence conducted by U.S. traders (and others who trade in American dollars) yields a meaningful outcome.