ON-THE-RECORD PRESS CALL
BY ASSISTANT TO THE PRESIDENT
FOR TRADE AND MANUFACTURING POLICY PETER NAVARRO
ON AN EXECUTIVE ORDER ENSURING SAFE AND LAWFUL E-COMMERCE
Via Teleconference
4:16 P.M. EST
MR. CANTRELL: Good afternoon, everyone. And thank you for joining this on-the-record briefing call on the President's executive order to Ensure Safe and Lawful E-Commerce. This briefing will be conducted by Assistant to the President for Trade and Manufacturing Policy, Peter Navarro.
Both Mr. Navarro's opening remarks and answers to your questions will be on the record. All information is embargoed until the conclusion of this call.
And with that, I'll turn it over to Peter.
MR. NAVARRO: Thank you, Austin. What I'd like to do for you this afternoon is tell you about the executive order that was signed today in the Oval and what its relation is to the action plan that the Department of Health and -- the Department of Homeland Security released last Friday.
The executive order was signed today in the Oval, in the afternoon, with Secretary Wolf, present along with Commissioner Morgan, General Counsel of the USTR Joe Barloon, Senior Counselor Kellyanne Conway, and Jim Carroll, the Director of ONDCP.
And when you write about this, you may want to think about this order as working hand in glove, or tongue in groove, with the actions that were set forth last week in the executive -- in the report issued by Homeland Security.
So what I'm going to do is first describe some of the big-picture problems, how it relates to the China phase one agreement and how it relates to the Section 321 de minimis exemption, and then go over the executive order in some detail to explain in layman's terms what it actually does.
The interesting thing here is that this is another example of promises made, promises kept. Candidate Trump promised in his June 2016 jobs plan speech outside of Pittsburgh that he would put an end to the theft of hundreds of billions of dollars of our intellectual property that China steals from America each year. The recently signed phase one trade deal provides a framework to do just that.
Counterfeiting is the purest expression of intellectual property theft. And much of the counterfeit trafficking we are observing today is facilitated by e-commerce platforms like Amazon, Alibaba, E-Bay, Shopify, JD.com, and WalMart.com.
Back in April, this whole effort to combat trafficking began with an executive order that the President signed directing DHS to come up with a coordinated strategy. The problem we have now is that when Americans shop online, they should have the expectation of privacy, safety, and confidence in their e-commerce platforms and online sellers that they engage with. Instead, Americans are just getting ripped off.
Today, when people shop online in what they think is the safety of their homes and on their favorite e-commerce platforms, they have an unacceptably high risk of being defrauded or even harmed by everything from contaminated infant formula, inferior child car seats, exploding batteries, and dangerous electronics, to deadly substances like fentanyl which can appear in fake prescription opioids. Put simply, what’s being sold on the Internet these days aren’t goods in a lot of cases -- they’re "bads.”
This crisis is not about any one e-commerce platform. This is about e-commerce platforms as a class playing by a different set of rules that simultaneously hammer brick-and-mortar retailers, defraud consumers, steal American jobs, and rip off intellectual property rights holders.
If you were to design a system to supercharge counterfeit trafficking, destroy American jobs, and defraud the American consumer, you could do no better than the intricate and shadowy networks of e-commerce.
Under current lax interpretations of existing rules and laws, e-commerce platforms face virtually no liability for their counterfeit trafficking. Today, virtually immune from the kind of laws and liabilities that govern bricks-and-mortar retail, e-commerce platforms such as Amazon, Shopify, Alibaba, e-Bay, JD.com, WalMart.com, and a constellation of lesser players provide the digital hubs that perniciously interconnect vast cadres of online third-party counterfeiters and social media enablers, like Instagram, to American consumers.
One perverse incentive here is that the e-commerce platforms often have higher profit margins on counterfeits than trusted brands, so bad things are incentivized and predictably happen.
E-commerce platforms like Amazon, Alibaba, JD.com, and Shopify also are the great enablers of counterfeit trafficking. Within days that a new American innovation appears for sale on the web, counterfeit -- counterfeiters in places like China can set up competing websites offering knockoffs made with inferior materials at a third of the cost and sold at half the cost. As soon as you put up a new innovation for sale on the Internet, it’s likely to be copied. This is an important point: The smaller the business, the more vulnerable it is because it doesn’t have the monitoring and legal resources to fight back.
E-commerce hubs like Amazon, Alibaba, Shopify, and WalMart.com are putting most of the burden of monitoring counterfeit trafficking on American intellectual property rights holders rather than taking any effective responsibility. As a further blow to informed consumer choice, the e-commerce platforms are not required by law to provide country-of-origin labeling on their websites, and most have steadfastly refused to do so voluntarily.
The current situation is the ultimate whack-a-mole on steroids. There’s no way these counterfeit moles, operating offshore, can ever be whacked unless the Amazons and Alibabas and Shopifys of this world either voluntarily step up to the plate or are held fully accountable by the government.
This also is an important point: E-commerce platforms like Amazon, e-Bay, and Alibaba claim they're spending considerable time and money battling counterfeit trafficking, but their expenditures amount to little more than a few grains of sand on a huge beach of tainted profits they are creaming from the counterfeit trade.
The American public is tired of e-commerce lobbyists being quoted in news stories about all the time and money they are expending to stop counterfeit trafficking. It’s just empty rhetoric and propaganda as this crisis in e-commerce continues to grow exponentially.
Every major e-commerce platform should today pledge and promise to stringently implement the set of best practices identified in the DHS action plan, and voluntarily assume far more responsibility for the poisons they are purveying. If they don’t, DHS will take steps to ensure that they do.
DHS will attack this problem head on. The tools of enforcement, as outlined in the historic DHS action plan, include new bonding requirements on high-risk importers, civil fines and penalties, debarment and suspension of bad actors, enhanced inspection of non-compliant posts, and mechanisms to close the so-called border town fulfillment shell game and Section 321 loophole.
It's also critical to move payment processors and banks onshore, within reach of the law. It’s a gaping e-commerce hole.
Let me talk just a little now about the Section 321 de minimis exemption and how it has become an open invitation to counterfeit trafficking.
The Section 321 de minimis exception -- exemption and its lax inspection requirements is the poster child for unintended consequences. Instead of facilitating global trade, it has helped enable both counterfeit trafficking and the illegal evasion of customs duties.
As the DHS action plan notes, quote: “This reduced level of scrutiny is an open invitation to exploit Section 321 rules to transport and distribute counterfeits.” Unquote.
You not only lose the tariffs, you also see this contraband come in virtually uninspected.
Under the current system, bulk cargo comes in from China to a U.S. port, moves in bulk across the border to a fulfillment center in Mexico or Canada, and then finds its way into the U.S. postal and express mail delivery systems as small Section 321 packages, designed to avoid both tariffs and, in the case of counterfeits, rigorous inspection. It’s a scam costing the U.S. Treasury billions while inflicting great harm on American consumers and workers.
These border fulfillment centers are in part designed to game the Section 321 de minimis system, but they blatantly break the spirit of the "one package per day" rule, as well as the prohibition on forwarding a single order in separate lots to secure the Section 321 benefit.
This is a problem that needs to be fixed. It’s surprising it has taken this long, but this President is attacking it in "Trump Time," which is to say as soon as possible.
All of the bad actors in e-commerce who have been taking a free ride on the pocketbooks of consumers and the innovation of IP rights holders are officially on notice that this administration is taking the strongest steps to stop counterfeit trafficking in its tracks.
Let me move now to talk a little bit about how the effort today -- this executive order -- and the companion DHS action plan fit into the broader context of the China phase one deal and the problem of counterfeiting.
In anticipation of a possible deal addressing intellectual property theft, the White House Office of Trade and Manufacturing Policy worked very closely with Customs and Border Protection over the last year to initiate Operation Mega Flex, which began last summer.
It’s a monthly “look under the hood” of thousands of additional packages arriving by air at ports of entry like LAX, Kennedy Airport, and other destinations, and it's designed to closely monitor counterfeit trafficking from China.
In the “blitzes” conducted thus far, customs agents have found so-called “discrepancies” in as much as 10 percent or more of the packages arriving from China and Hong Kong by air. Roughly a third of the discrepancies are counterfeit products.
The rest are things like contraband, such as fake driver's licenses, automatic -- illegal automatic weapons parts. You have all sorts of agricultural violations, including the attempt to smuggle pork infected with the African Swine Flu into this country, a problem that could infect the American farms and be disastrous.
Here's an important point: An acceptable rate of customs discrepancies for counterfeit products and other contraband, such as fentanyl or gun silencers, coming in from countries like China should be well under 1 percent. Right now, we are seeing 10 times that rate or higher through Operation Mega Flex.
We're talking about over 100,000 packages a day coming into the U.S. from China that can defraud, harm, or even kill Americans. We get roughly a hundred mil- -- excuse me, we get roughly a million packages per day from China.
Under the phase one China deal, over the next six months, we expect to see a quick and dramatic reduction in the rates of counterfeits and other contraband, such as fentanyl, coming into America from China. Absent such a quick and sustained reduction in China’s IP theft, the phase one deal will be enforced accordingly.
The Trump administration is also going to hold both the counterfeit traffickers in China and the counterfeit enablers, like Amazon and Alibaba and Shopify, accountable for the great harm they are doing to American consumers, manufacturers, and workers.
Let me turn now to the executive order and break that down for you to explain in layman's terms what it actually does.
It begins with section one, which is simply a statement of policy which highlights the need to protect consumers, intellectual property right holders, business and workers from counterfeit goods, narcotics like fentanyl and other contraband.
The two sections -- section two and three -- are designed to target bad actors and remove them from the Importer of Record Program, which is a privilege that helps facilitate imports into the United States.
Section two directs CBP to prevent freighters who flout U.S. law from participating in the Importer of Record Program.
Section three directs CBP to take steps to make sure these traders don’t try to come in the back door by changing their name, address, or corporate forum. It also directs CBP to consider taking more drastic measures if needed.
Section four is effectively a démarche to foreign postal services. It directs the State Department, working with the postal service, to put the world on notice that the U.S. is taking a stand against those who ship fentanyl, counterfeit goods, and other contraband into the U.S. It directs CBP to work with these postal services to come up with ways that we can get the foreign post to work with us to solve the problems.
The section five is a very, very important part of this executive order and it dovetails with Operation Mega Flex. The section directs CBP to come up with criteria that international posts should need. If the posts consistently fail to meet these standards, CBP will target their goods for inspection and could take more drastic measures, such as blocking all shipments from those posts.
The direction is to develop an international mail noncompliance method based on relevant factors, formulate an overall compliance for each international post, and then use that score to help prevent contraband from coming into the U.S.
CBP is directed to take into account not just the rates of trafficking of counterfeit goods, but also whether we are receiving narcotics such as fentanyl and other contraband. And you can see, if you look at Operation Mega Flex, that that is basically the foundation of a noncompliance score because we already have about six months of data now, which tell us what the rates of discrepancies are coming in from China. And we also have a very detailed analysis of the kinds of things we're getting.
As I said earlier, you've got the usual suspects and fake Rolex watches and fake electronics and things like that, but you also got more exotic things like gun silencers and fake driver's licenses and pork infected with African Swine Flu.
In section five, the Secretary is directed to update the compliance scores on a quarterly basis and determine a minimum threshold compliance score for each quarter, and deem anyone noncompliant if the international post scores below that threshold in the quarter.
Now, here's what's important: If we have a case where an international post continues to fail to meet the minimum threshold, Homeland Security, working with CBP, is fully empowered to take measures to protect the U.S. from shipments from those international posts and they’re allowed to take whatever measures they deem necessary to do that.
So this is a very important part of the executive order. The -- section six is likewise important. It basically directs the Attorney General, within 60 days, to assign appropriate resources to ensure that federal prosecutors accord a high priority to prosecuting offenses related to import violations.
The problem now is that is not the case. And given what we’re seeing coming in in our Operation Mega Flexes, which we also call “blitzes,” it’s absolutely critical that we invoke the long arm of the law here to its full extent.
So let me stop there and see what kind of questions you have, and hopefully I can provide an answer or two.
Q Hi. This is Mara Lee from International Trade Today. I had a question. You talk a lot about foreign posts, but you don’t say anything about express shippers. Are they not part of the problem?
And also when you talk about goods coming in at bulk at the port, then being trucked to Canada or to Mexico to come across one by one to consumers under de minimis, are those not coming in to U.S. ports where there’s an opportunity for --
MR. NAVARRO: Hang on. Hang on. Hang on. Hang on. Let’s do this: Let me take the first question and then you can state the second question.
Q Sure.
MR. NAVARRO: So your first question is -- relates to the different express mail consigners versus the international post. So interestingly enough, if you look at the discrepancy rates that we see, we’re actually seeing discrepancies at the express mail consigners as well. This is not statistically significant but DHL Cincinnati has kind of stood out as an outlier among the express mail consigners, relative to, say, FedEx in Indianapolis or Memphis, or UPS in Louisville.
So the answer to your question is: We see this as a problem that we’re going to need the cooperation of both the international post, as well as the express mail consigners.
Now, what’s your second question, ma’am?
Q You mentioned the problem of people violating the spirit of Section 321 by bringing goods in in bulk to the port, then moving them to a Canadian warehouse and sending packages to consumers out of that warehouse. Are those goods that are being imported coming into a U.S. port? Doesn’t CBP have an opportunity to inspect at that point?
MR. NAVARRO: All right, so first of all, I think it’s -- it’s an open question as whether these border town fulfillment centers are violating the spirit or actually the letter of the law. I mean, if you look at the letter of the law, what it says is you can’t benefit from this 321 exemption if you break up large lots into small, for the purpose of evading the rule. And that’s what they’re doing.
So just on that alone, it’s clear that one could argue that they’re violating the law. So that’s number one.
What they do is -- what they appear to be doing is sending packages over in small lots. They just drive them across the border in small lots and take them to the post office or UPS and send them under 321. And they are able to do that under the rules of border crossings and it’s pretty interesting.
I mean, there’s -- I wish I actually had this in front of me now, but there’s a -- if you go on Mr. Google there, there’s actually an interesting memo from somebody who explains how to game the system, taking advantage of the existing rules.
All right, next question.
Q Yes, hi. Eric Poders -- the North Shore Voice, out of Chicago. I'm working on a little investigation here, and I was curious: Are you aware of the business practices and banking practices of the former GE Capital, which is now running under the umbrella of Synchrony Bank, and their international operations, running offshore, I guess, call centers, if you can, in other countries, and people using skimming devices on gas stations, specifically -- like, you know, on the islands where you put your card in and swipe it, not utilizing --
MR. NAVARRO: All right, let me stop you there. No, I'm not, so let's go on to the next question.
Q Hey, this is Jason Miller from Federal News Network. Appreciate the call. I had another minutiae question that maybe you won't be able to answer, so let me just give it a try. First of all, the e-commerce platforms, as you describe it -- Amazon, Walmart, Alibaba, et cetera -- the General Services Administration currently is trying to create an e-commerce platform for government based on these kind of commercial best practices.
How will this EO affect or, if you will, influence that e-commerce platform? Because in the EO, as you said, it potentially could be -- companies could face suspension and debarment, which means they would not be eligible to bid. And we've seen -- for instance, Walmart and Amazon, as two examples, are already interested in bidding on this procurement.
So I know it's a little bit of minutiae, but if you're able to maybe talk broadly about suspension and debarment?
MR. NAVARRO: Well, the only value add I can give here is to refer you to the DHS action plan that was released last Friday. It's well worth a look at the best practices that we are strongly recommending for e-commerce platforms. And I think it's worth spending just a minute on these things.
One of the problems right now is a lot of these platforms don’t have comprehensive terms of service agreements so that if somebody does something wrong, they can immediately take them down and get them out of the system. There's absolutely awful vetting, in many cases, of the third-party sellers, to the point where maybe they don’t look at them much at all, or even if they look at them, they don’t bother to see how many aliases they're operating under. They're just -- it's almost as if they don’t want to know.
Limitations on high-risk products: I mean, it's -- the airbags, infant formula -- these are some of the things that have been shown to have very risk of counterfeiting. And if you've got it on your site and you don’t take the appropriate steps, that's just crazy. You have the notice, takedown, and shutdown procedures.
You know, one of the most important things that Amazon could do tomorrow to show good faith to the American people would be to begin identifying country of origin on their websites. This is a tremendous disadvantage to bricks-and-mortar retailers. If you go onto a brick-and-mortar retail store, you will see the country of origin clearly on the label. And if you get a counterfeit, you can sue them. You can do neither with Amazon.
And Amazon has steadfastly refused to put that kind of information on their websites, and my judgment borders on the criminal for them to do that because they -- on the one hand, they say that they want to crack down on this stuff; on the other hand, they do not provide consumers with the appropriate information to solve the problem.
MR. CANTRELL: Great. Thank you, Operator. This will now conclude our call. Again, the entire call was on the record. As always direct all further questions to the White House Press Office. Thank you, everyone, and have a great weekend.
END 5:35 P.M. EST
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