Implementing the Reduced China Tariffs

This week, the United States Trade Representative (USTR) published a notice that would reduce reducing the rate of additional tariffs on List 4A products to 7.5%, effective February 14, 2020.

Goods on List 4A are currently subject to a 15% additional tariff, effective Sept. 1, 2019.

This reduction does not affect the 25% tariffs that apply to aircraft parts imported from China.

The notice is only found on the USTR website and has not yet been published in the Federal Register.

New Agreement With China – No Relief for US Aircraft Parts Importers

I almost titled this post “Boeing Wins. Aviation Loses.”  But I am not sure that Boeing even wins under this Agreement.

The United States and China have signed a new trade agreement.  For most of the aviation industry, very little changes.  Aircraft parts imported into the United States that were subject to the 25% duty associated with the section 301 tariff, continue to be subject to the 25% duty levied on parts from China.

China has agreed to place orders for additional manufactured goods.  The list of manufactured goods includes complete aircraft, but does not include aircraft parts.  The obligation can be met by merely placing orders.  Thus China can meet its obligations under the new agreement by placing orders for aircraft for the first three years and then refusing delivery after the three year term of the agreement.  So even though it looks like this could be a boon for Boeing, it might not be as beneficial as one might think.  Furthermore, there is no agreement to purchase aircraft parts, and companies like Boeing sell a significant volume of parts.

The agreement does not appear to change the List One tariffs.  The list one tariffs became effective on July 6, 2018 and placed an additional duty rate of 25% on $34 billion worth of goods from China.  The list one goods include (but are not limited to):

  • 40113000 (New pneumatic tires, of rubber, of a kind used on aircraft)
  • 40121300 (Retreaded pneumatic tires, of rubber, of a kind used on aircraft)
  • 84071000 (Spark-ignition reciprocating or rotary internal combustion piston engines for use in
    aircraft)
  • 84091000 (Parts for internal combustion aircraft engines)
  • 84111140 (Aircraft turbojets of a thrust not exceeding 25 kN)
  • 84111240 (Aircraft turbojets of a thrust exceeding 25 kN)
  • 84112140 (Aircraft turbopropellers of a power not exceeding 1,100 kW)
  • 84112240 (Aircraft turbopropellers of a power exceeding 1,100 kW)
  • 84118140 (Aircraft gas turbines other than turbojets or turbopropellers, of a power not
    exceeding 5,000 kW)
  • 84118240 (Aircraft gas turbines other than turbojets or turbopropellers, of a power exceeding
    5,000 kW)
  • 85030045 (Stators and rotors for electric generators for use on aircraft)
  • 85030090 (Parts for electric generators suitable for use on aircraft)
  • 85443000 (Insulated ignition wiring sets and other wiring sets of a kind used in vehicles, aircraft
    or ships)
  • 88031000 (Parts of airplanes and other aircraft, propellers and rotors and parts thereof)
  • 88032000 (Parts of airplanes and other aircraft, undercarriages and parts thereof)
  • 88033000 (Parts of airplanes and helicopters, not elsewhere specified or included)

As a condition of the agreement, the United States apparently agreed to cut certain (non-aviation) tariffs from a 15% duty to a 7.5% duty.  The USTR Fact Sheet acknowledges that “The United States has agreed to modify its Section 301 tariff actions in a significant way.”  These alleged modifications/reductions in duty rates are not part of the written agreement between China and the US, that has been released, so it is possible that US importers will continue to pay these duties.

Changes to US’ China Tariffs, But Little Relief for Aircraft Parts

The US-China trade conflict, and the negotiations seeking to settle it, remain as front-page news.  But there are some quiet behind-the scenes changes that are creating narrow exclusions for certain types of goods.  Just not for aircraft parts.

Although the United States has imposed duties on aircraft parts from China, the United States Trade Representative (USTR) initiated a product exclusion process in June 2019.  This permitted “interested persons” to request exclusion of specific products from the tariff schedules.  On Monday, the government announced new exclusions.

The government created new exceptions for valve lifter (for piston engines) but specifically excluded valve lifters for aircraft engines.  This shows us that aviation parts remain a focus for the USTR.

Details of the ‘Phase One” trade deal between the US and China have not yet been released, but it appears likely that aircraft parts will not be given relief under that “phase one” trade deal.

Meanwhile, China appears to be reducing certain duties charged for imported US goods.  They’ve announced targetted tariff reductions and published a list of 859 products for which the duties are being lowered in 2020.  Some of the key aviation-related tariffs listed in this table include these five:

 

Chinese Tariff Code Chinese Good Description Google translation – the original Chinese takes precedence! Most favored nation tax rate in 2020 (%) Provisional tax rate in 2020 (%)
7007 1110 空载重量25吨及以上飞机的挡风玻璃 Windshield of aircraft with an unladen weight of 25 tons and above 2 1
8412 2990 压力值在20MPa以上的飞机用液压作动器 Hydraulic actuators for aircraft with pressures above 20 MPa 14 1
8482 1040 飞机发动机用外径30CM的推力球轴承 Thrust ball bearings with an outer diameter of 30CM for aircraft engines 8 1
9032 8990 飞机自动驾驶系统(包括自动驾驶、电子控制飞行、自动故障分析、警告系统配平系统及推力监控设备及其相关仪表) Aircraft autopilot system (including autopilot, electronically controlled flight, automatic fault analysis, warning system trim system, thrust monitoring equipment and related instruments) 7 1
9032 9000 飞机自动驾驶系统(包括自动驾驶、电子控制飞行、自动故障分析、警告系统配平系统及推力监控设备及其相关仪表)的零件 Aircraft autopilot system (including autopilot, electronically controlled flight, automatic fault analysis, warning system trim system, thrust monitoring equipment and related instruments) 5 1

 

Note that based on the translations, the Chinese Tariff Codes do not appear to line-up with the corollary tariff codes in the US Harmonized Tariff Schedule.

US Government Adds New Self-Disclosure Policy for Export Violations

The Department of Justice announced the release of a revised voluntary disclosures policy for export control violations.

The Department of Justice can prosecute wilful violations of the export laws, including:

  • The Arms Export Control Act (AECA), 22 U.S.C. § 2778,
  • The Export Control Reform Act (ECRA), 50 U.S.C. § 4801 et seq., and
  • The International Emergency Economic Powers Act (IEEPA), 50 U.S.C. § 1705

The revised policy is meant to reward companies that engage in voluntary self-disclosure in situations that might otherwise lead to criminal prosecution.  Assistant Attorney General for National Security John C. Demers explained:

“Protecting our nation’s sensitive technologies and preventing transactions with sanctioned entities are DOJ priorities, but we cannot succeed alone.  We need the private sector to come forward and work with DOJ.  The revised VSD Policy should reassure companies that, when they do report violations directly to DOJ, the benefits of their cooperation will be concrete and significant.”

The new voluntary disclosure policy includes three key changes.  These changes are intended to promote voluntarily self-disclose to the DOJ.

    1. The Policy clarifies the benefits that are available to companies that voluntarily disclose a violation (“Self Disclossure”), fully cooperate with the Justice Department (“Full Cooperation”), and timely and appropriately correct the issues (“Timely and Appropriate Remediation”).
    2. The Policy was reformatted to more closely resemble other DOJ self-disclosure guidance. This was meant to better standardize the way that DOJ handles self-disclosures. Specifically, it harmonized the definitions of “Voluntary Self-Disclosure,” “Full Cooperation,” and “Timely and Appropriate Remediation” with the same terms in the Foreign Corrupt Practice Act Corporate Enforcement Policy.
    3. The Policy clarifies that disclosures of potentially willful conduct made to regulatory agencies, and not to DOJ, will not qualify for the benefits provided in the Policy.

The policy now clarifies that there is a presumption that the company will receive a non-prosecution agreement and will not be assessed a fine, in the absence of aggravating factors.  If aggravating circumstances warrant an enforcement action other than a non-prosecution agreement, but the company satisfies all other criteria, the Policy states that DOJ will recommend a fine that is at least 50 percent lower than what would otherwise be available under the alternative fine provision and will not require the imposition of a monitor.  The prior guidance did not provide a presumption of any kind, and did not assign any concrete benefits to companies that met its criteria.

The policy became effective on December 13, 2019.  It applies only to export control and sanctions matters before the National Division’s Counterintelligence and Export Control Section.  It does not apply to any other section in the National Security Division, any other part of the Department of Justice, or any other agency.

Ryan and I have counseled a substantial number of clients on voluntary disclosures before a number of agencies. The last change – that disclosures of potentially willful conduct made only to regulatory agencies will not qualify for the benefits provided in the policy – is a significant element in this policy.

This new policy may make it beneficial to make a disclosure to the DOJ, in self-disclosure situations.  Because it will but it will create additional burdens on the disclosing company, it is important to review the occurrence to assess whether there is a reasonable possibility of criminal prosecution.  Where there is no reasonable possibility of criminal prosecution, or where prosecution would likely emanate from another division of the DOJ, disclosure might be unnecessary.  Any company considering self-disclosure of any occurrence or issue should consult with a qualified attorney who understands self-disclosure law, to make sure your disclosures are made to the right parties, and made in the right form and with the right information, in order to be effective.

No EASA Form 1 for Certain EU Parts?

EASA has published the comment respond document (CRD) and Opinion for its rule concerning “Installation of parts and appliances that are released without an EASA Form 1 or equivalent.”

ASA has been talking about this proposal a lot, so many of our members are already familiar with the proposal.  It would allow the design approval holder (DAH) to classify articles, and to permit certain articles to be exempted from the regulations (so that the regulator would have no production oversight over the article).  This would be performed in the context of preparation of the ICAs, as a privilege of the design approval holder.  The reason for classifying articles is to define a class of articles that do not need production approval, and that do not need EASA Form 1.

The DAH could choose to classify parts into two categories.  The categories would be distinguished based on the safety effect of the article as installed on the aircraft

  • Category One would reflect the norm, under which articles are produced under production organization approval (POA) and bear an EASA Form 1. This will be the default in cases where the manufacturer does not classify articles.
  • Category Two would reflect articles with a negligible safety effect. The regulators would not regulate the production of such parts.  Such articles would not require EASA Form 1 to be received by a Part 145 organization.  This would allow the DAH to de-regulate an article.

Classifying parts into category two would be a voluntary activity.  The DAH would determine the safety effect and would publish the list of category two parts in the instructions for continuing airworthiness (ICA).

The proposed language in the regulation that EASA is proposing to the European Commission for the rules would state:

“1. An organisation responsible for the manufacture of products, parts and appliances shall demonstrate its capability in accordance with the provisions of Annex I (Part 21). This demonstration of capability is not required for the parts or appliances that an organisation manufactures which, in accordance with the provisions of Annex I (Part21), are eligible for installation in a type-certified product without the need to be accompanied by an authorised release certificate (i.e. EASA Form 1).’;”

Corollary language in the annex, section 21.A.307, would explain thatit is not necessary to obtain production approval for:

“a part or appliance for which the consequences of a non-conformity with its approved design data has a negligible safety effect on the product and which is identified as such by the holder of the design approval in the instructions for continued airworthiness. In order to determine the safety effects of a non-conforming part or appliance, the design approval holder may establish in the instructions for continued airworthiness specific verification activities to be conducted by the installer of the part or appliance on the product;”

This language would provide a regulatory (“hard law”) basis for the EASA proposal.

The proposed rule still has problems.  ASA pointed out in comments that the ICA is typically not made available to distributors, and therefore it could become impossible for distributors to know the compliance obligations for articles, due to the fact that it would be impossible for distributors to know whether the articles were placed into category one or category two.  If a third party produced the parts under a claim that they were category two, then this claim would not be verifiable because the verification data would not be publicly available (thus a manufacturer could fabricate unapproved parts, erroneously call them category two, and introduce them into the system without EASA Form 1; and a distributor would have no way to verify whether the articles are category 1 or 2).  This opens to the door to introduction of unapproved parts, and undermines the systems that distributors have used to help protect air carriers from bad parts.

EASA has also discussed possibly using CS-STAN to identify articles that are considered to have ‘negligible safety effect’ and which can, therefore, be installed without an EASA Form 1.  This would be for articles that EASA feels generally have a negligible safety effect.

In comments, Rolls Royce Deutschland, the FAA, MARPA and ASA all suggested that this might be inconsistent with state duties under ICAO norms.  ASA suggested that the proposal might be inconsistent with European obligations under the Chicago Convention, Annex 8, Part II, section 2.2.1.

There is a possibility that this rule may change nothing,.  A comparable rule in the U.S., the commercial parts rule, was ill-formed and did not get used the way it was expected to be used.  So too, this new EASA rule might not be used and the industry may find itself unchanged after this rule.

 

Change 7 to the FAA-EASA Maintenance Annex Guidance

Change seven to the FAA-EASA Maintenance Annex Guidance has been published.  The 171 page document was effective on its publication date (November 18, 2019) and must be implemented within 90 days of the issue date (February 16 is a Sunday, so that means February 17, 2020).

The latest draft appears to correct the prior omission of third parties authorities – like Brazil – by drawing reference to the third-party bilateral agreements.

ASA will publish more about how this affects distributors, soon, and this will be a topic of discussion at the Quality Committee Meeting on Friday December 6, 2019, in Dallas.

Transitioning UK MOA Certificates

ASA sponsored a webinar today on aircraft parts documentation expectations after Brexit.  One of the questions raised was whether the EASA certificates that will be issued to certain businesses (as third-country approval holders) will be the same as the comparable UK CAA certificates.  The short answer is that the certificate numbers will be similar, but the EASA certificates will have a different prefix in order to make them distinguishable.

As part of the webinar, we discussed the EASA offer to issue third-country certificates [like repair station certificates and production organization authorizations] to UK-based businesses.  The process is that

  1. the UK-based company applies to EASA for third-country approval;
  2. EASA assesses the company’s fitness to hold an EASA approval;
  3. The fitness assessment is carried out by EASA’s technical agent in the UK (UK CAA);
  4. EASA maintains a list of UK-based companies that will get EASA third-country approvals;
  5. Immediately after Brexit, EASA will email copies of the new approvals to the UK-based companies;
  6. The EASA approvals will be equivalent to any other EASA-third-country approvals;
  7. The UK-based companies will continue to hold their UK CAA approvals, as well.

The two most important EASA approvals, for most of ASA’s members, will Maintenance Organization Approvals (MOAs) and Production Organization Approvals (POAs).  ASA members may wish to know which of their UK-based business partners have opted to apply for EASA third-country approvals.  You can find the lists here:

Both of these lists are tentative, in that they describe applicants from the UK, who will not be issued their credentials until and unless the UK leaves the EU.

It appears that the current UK CAA MOA certificates numbers are in the form “UK.145.nnnnn” where “nnnnn” is a five-digit number.  EASA anticipates issuing MOA certificates in the format “EASA.UK.145.nnnnn” where “nnnnn” is the same five digit number that was issued by the UK CAA.  For example, Patriot Aviation Engineering’s UK CAA certificate number is UK.145.00002.  They have applied for third-country certification from EASA.  Upon Brexit, EASA intends to issue to Patriot an EASA MOA certificate number EASA.UK.145.00002.

A similar pattern emerges for POAs.  The current UK CAA POA certificates numbers are in the form “UK.21G.nnnn” where “nnnn” is a four-digit number.  EASA anticipates issuing POA certificates in the format “EASA.UK.21G.nnnn” where “nnnn” is the same four-digit number that was issued by the UK CAA.  For example, Dunlop Aircraft Tyres’ UK CAA certificate number is UK.21G.2008  They have applied for third-country certification from EASA.  Upon Brexit, EASA intends to issue to Dunlop an EASA POA certificate number EASA.UK.21G.2008.

As we discussed today in the webinar, which authority is responsible for the documentation can have a dramatic effect on which authorities are able to accept that paperwork.  Look carefully at the documentation you receive, so you know whether the documentation is signed-off under the UK CAA approval number or under the EASA approval number.

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