Where Do We Stand?

Source: Canada US
Link: Where Do We Stand?

Originally published by the Journal of Commerce in April 2020

We are clearly in unchartered territory at the moment, and most people have the same question – when will things get back to normal? Right now, the truth is no one knows, so all we can concentrate on is the work we have and how to manage our expectations. Those of us in international trade already understand how the supply chain works. It requires international cooperation, and for the regulators to be in the loop from the beginning as active participants in expediting cargo movement. It is also equally obvious there is a shortage of personal protective equipment (PPE), but not food. When it comes to food, the supply chain is seriously disrupted (for reasons that include the current pandemic), but that can be fixed more easily than the very serious PPE shortage.

When it comes to PPE, we see a plethora of activities taking place with one goal – trying to figure out where the items are and getting them where they will do the most good and quickly, plus – get more and fast! The public arguments revolve around which destinations are being serviced and the quantities each is receiving, but that is all about supply and demand, and those of us in international trade know you have to plan for supply chain disruption, and that is a pro-active not a reactive exercise.  At this moment, regretfully, all we see is reaction not implementation of well thought out disaster planning.

Nonetheless, in the last few days, we have seen activity by many different federal agencies seeking to address their piece of the process. In no particular order, Customs and Border Protection issued CSMS 42320854 on April 9, 2020. There was coverage in the general press about PPE being seized at ports upon arrival with the reasons not clearly explained. International traders know if that really happened, there had to be serious non-compliance.  While those stories are isolated, this CSMS makes clear that if the PPE (or anything else) is imported for relief efforts related to the COVID-19 pandemic, the donation may only occur once the Federal Emergency Management Agency (FEMA) has exercised its gift acceptance authority and the State Dept. sanctions the transaction.  For the goods to be entered duty free, the receiving entity must be a tax-exempt charitable organization and the standard risk assessment is first conducted. Any items imported that do not comply with these procedures, and are not government-to-government assistance, are subject to the usual import process and duty payment.

Also on April 9, 2020, CBP issued a guidance regarding “… Allocating Certain Scarce or Threatened Health and Medical Resources to Domestic Use”  which is focused on the exporting of PPE and related products. Scarce resources are defined as:

“(a) N95 Filtering Facepiece Respirators, including devices that are disposable half-face-piece non-powered air-purifying particulate respirators intended for use to cover the nose and mouth of the wearer to help reduce wearer exposure to pathogenic biological airborne particulates.

(b)  Other Filtering Facepiece Respirators (e.g., those designated as N99, N100, R95, R99, R100, or P95, P99, P100), including single-use, disposable half-mask respiratory protective devices that cover the user’s airway (nose and mouth) and offer protection from particulate materials at an N95 filtration efficiency level per 42 CFR 84.181.

• Elastomeric, air-purifying respirators and appropriate particulate filters/cartridges.
• PPE surgical masks, including masks that cover the user’s nose and mouth and provide a physical barrier to fluids and particulate materials, and
• PPE gloves or surgical gloves, including those defined at 21 CFR 880.6250 (exam gloves) and 878.4460 (surgical gloves) and such gloves intended for the same purposes.”

In its guidance, CBP makes clear that FEMA’s focus is on commercial quantities, meaning  shipments valued at $2,500 or more and containing more than 10,000 units of gloves, masks or the other commodities referenced above.

The following exports are excluded: 1) To Canada or Mexico; 2) To U.S. Government entities, such as military bases; 3) By U.S. Government agencies; 4) By U.S. charities; 5) By critical infrastructure industries for the protection of their workers; 6)  By 3M Company; 7) Express or mail parcels that are not of commercial quantities; and 8) In-transit shipments. The 3M exclusion was noteworthy, and is discussed later in this article.

For shipments that do not meet these criteria, document reviews and/or physical examinations should be expected. The ground for detention will be 50 U.S.C. §4511(a) which states:

(a)Allocation of materials, services, and facilities

The President is hereby authorized (1) to require that performance under contracts or orders (other than contracts of employment) which he deems necessary or appropriate to promote the national defense shall take priority over performance under any other contract or order, and, for the purpose of assuring such priority, to require acceptance and performance of such contracts or orders in preference to other contracts or orders by any person he finds to be capable of their performance, and (2) to allocate materials, services, and facilities in such manner, upon such conditions, and to such extent as he shall deem necessary or appropriate to promote the national defense.

Also worth keeping in mind  is 50 U.S.C. § 4511(b):

(b)Critical and strategic materials

The powers granted in this section shall not be used to control the general distribution of any material in the civilian market unless the President finds (1) that such material is a scarce and critical material essential to the national defense, and (2) that the requirements of the national defense for such material cannot otherwise be met without creating a significant dislocation of the normal distribution of such material in the civilian market to such a degree as to create appreciable hardship.

For these purposes, national defense is defined at 50 U.S.C. § 4552(14) to mean: “programs for military and energy production or construction, military or critical infrastructure assistance to any foreign nation, homeland security, stockpiling, space, and any directly related activity. Such term includes emergency preparedness activities conducted pursuant to title VI of The Robert T. Stafford Disaster Relief and Emergency Assistance Act [42 U.S.C. 5195 et seq.] and critical infrastructure protection and restoration.”

This agency activity follows on the heels of President Trump’s April 3, 2020 memorandum bearing the same name – “Memorandum on Allocating Certain Scarce or Threatened Health and Medical Resources to Domestic Use.” Therein the DHS Secretary through FEMA is directed to “use any and all authority available …. to allocate to domestic use, as appropriate,” the very products listed in CBP’s guidance. Issued earlier was Executive Order 13910, dated March 23, 2020, dealing with efforts to stop any hoarding and price gouging related to PPE, along with sanitizing and disinfecting products in particular, and health and medical resources more broadly, including delegating to the Health and Human Services Secretary the ability to accumulate resources,  and designate material as scarce or if its supply is threatened.

The most recent action is the April 10, 2020 Federal Register notice in which FEMA issued a temporary rule (effective for 120 days) dealing again with how to allocate these same scarce and threatened materials for domestic use.  Relying on the Defense Production Act of 1950 and specifically 50 U.S.C. §§ 4511 and 4554, along with various Executive Orders, and other authorities, FEMA directs CBP to detain all shipments of any covered goods (those listed in CBP’s guidance) until FEMA approves their export. FEMA also states it will make its decision in a reasonable period of time once notified about the proposed export, and will either return the good for domestic use, issue a rated order (equivalent to a purchase order or purchase contract) for the shipment or allow its export in whole or in part.

Factors that FEMA says it will consider are: 1) the need to ensure that scarce or threatened items are appropriately allocated for domestic use; 2) minimization of disruption to the domestic and international supply chain; 3) the circumstances surrounding the distribution of the materials and potential hoarding or price-gouging concerns; 4) the quantity and quality of the materials; 5) humanitarian considerations, and 6) international relations and diplomatic considerations.  The rule contains an exemption for shipments made by U.S. manufacturers having continuous export agreements with foreign buyers in place since at least January 1, 2020, provided at least 80% of that manufacturer’s domestic production on a per item basis was distributed in the U.S. in the preceding 12 months. The FEMA Administrator, of course, reserves the right to take any other needed action, while working with manufacturers, brokers, distributors, exporters and shippers to gain compliance.

What all of this tells us is the process will take some time to get properly organized and run relatively smoothly. However, before concluding this article, as was obvious, 3M was singled out from having its products exported.  On April 2, 2020,  President Trump issued a “Memorandum on Order Under the Defense Production Act Regarding 3M Company” permitting the FEMA Administrator to use all of his authority to obtain “any and all” N-95 respirators as deemed appropriate from 3M and any subsidiary or affiliate.  Not surprisingly, 3M took exception to being called out, pointing out publicly its existing efforts to work with the Administration regarding the PPE supply. This action came against a backdrop where orders of 3M’s N-95 masks destined for Province of Ontario, Canada were detained by U.S. authorities. News outlets reported a separate shipment destined for the Berlin Federal Police was en route and got turned around by U.S. authorities.  To some extent, the uproar which followed makes clear why the exclusions published were selected. However, as with any new regulatory procedure, some amount of chaos is inevitable. The rollout here was particularly disorganized because no apparent advance disaster planning had been done.

To borrow a phrase from Carnegie Endowment, we are at a point in time where how the U.S. moves forward regarding medical devices and equipment, medicines, and food, will be a “Make or Break Test for U.S. Diplomacy.”  The temptation has been to reshore all such production, but frankly, that is too costly and just plain impossible in the intertwined world in which we live. Every country that exports also imports and vice versa (goods and/or services), so good luck shutting that off!   The solution rather is to diversify the supply chain relying on data and transparency. Also, tariffs for critical products should be temporarily suspended and permanently eliminated in the future by international agreement, and the clearance process expedited. Well-thought out and flexible supply chains make all the difference, and the U.S. government is no exception.