News
April 4, 2018

Section 301: Trump Administration Announces Proposed Targets for New Tariffs and Contemplates Investment Restrictions—and China Responds in Kind

Advisory

What you need to know:

  • The Trump Administration is considering imposing new tariffs of 25 percent on imports from China. Targeted imports include a wide range of products from chemicals and pharmaceuticals to electrical equipment, machinery, vehicles, medical devices and parts and components.
  • The Administration has requested comments on the proposed list of products that will be subject to the tariffs.
  • Comments are due May 11. A public hearing will be held May 15. The final list of products subject to the tariffs will likely be announced in June.
  • China has announced that it will respond if the US imposes unilateral tariffs or trade and investment barriers.

Background

Following an investigation of Chinese trade practices and industrial policy, on March 22, the Trump Administration announced its intention to impose trade penalties on Chinese imports and restrict certain Chinese investment in the United States. On April 3, the Office of the United States Trade Representative (USTR) announced the list of Chinese products it proposes to penalize with 25 percent tariffs. USTR is accepting comments on the proposed list until May 11, 2018, and will hold a public hearing in Washington, DC on May 15, 2018. Following this process, final decisions will be made on what products will be subjected to the additional tariffs, with commentators suggesting tariffs could be imposed in early June.

This investigation was launched under authority granted by Section 301 of the Trade Act of 1974 to investigate foreign trade practices and take action to compel another country to eliminate unfair, unreasonable or discriminatory practices that burden US commerce. At the same time, the Administration also announced and then initiated a WTO dispute challenging China's practices related to the granting of technology licenses to US firms operating in China. In addition, President Trump told the Treasury Department to propose new investment restrictions on China, and asked for a progress report on this issue by late May.

Since the creation of the World Trade Organization (WTO) in 1995, the United States has attempted to address unfair foreign trade practices through WTO dispute settlement, and has not acted unilaterally under Section 301. However, the Trump Administration appears poised to take unilateral action against China by both imposing duties on certain imports and restricting investment activity by Chinese firms in the United States. It is likely that China will challenge the unilateral tariffs as inconsistent with WTO rules. China also has signaled it would take proportionate countermeasures against US interests if the US puts new tariffs on Chinese goods. China recently demonstrated its resolve in this regard by promptly imposing trade restrictions on US exports, in reaction to the steel and aluminum tariffs just imposed by the Trump Administration. The United States' new unilateralism also could engender copycat behavior by other countries.

Tariffs on Imports from China

The White House has announced plans to impose 25 percent tariffs on $50 billion worth of imports from China that are "supported by China's unfair industrial policy."

On April 3, USTR published a proposed list of products to be targeted by the new import tariffs. Those products fall mainly into the pharmaceutical, medical device, machinery and machine parts, information communications technology (ICT), aerospace, iron/steel and aluminum sectors, although products from a number of other sectors are also hit. A full list of products is provided here.

USTR will be accepting comments on this proposed list until May 11. At the end of the comment period, USTR will hold a hearing and will accept post-hearing submissions, as well. The comments and hearing offer a critical opportunity for companies and other interested parties to provide information about the impacts of the proposed tariffs on the US economy and US jobs, as well as the advisability of targeting particular products or product categories.

These proposed tariffs could have significant impacts on various sectors of the US economy, including retailers, consumer electronics producers, and US-based companies producing components of finished goods targeted for new tariffs, as well as US-based manufacturers relying on imports for key components.

Stakeholders concerned either about particular products included on the proposed list or about ensuring that particular products in a targeted sector remain off the list, should plan to submit formal comments to USTR, as well as communicate with their congressional representatives and executive branch allies. It is important to note that products not currently included on the list could be added to the list later if no opposition is registered. Products that comprise a large segment of US imports and that have international substitutes could be top priorities for inclusion in a final list. Stakeholders in favor of including particular products likewise should express their views. Companies and organizations with views more broadly on the economic or policy impacts of imposing unilateral tariffs under Section 301 also should consider expressing those views.

New Restrictions on Chinese Investment in the United States

As part of the Section 301 action, the Administration also announced its intention to create new rules that limit Chinese investment in, or acquisition of, sensitive US companies or technology. President Trump directed the Treasury Department to explore options for new investment restrictions using "any available statutory authority." Thus, while any new restrictions must be grounded in existing statutory authority, Treasury is likely to be able to rely on a range of laws and regulations to develop a proposal. In addition to existing national security authority to review cross-border investment transactions, the Administration might also rely on other authorities, such as export controls and government procurement rules, or even broader powers to act in an international emergency, to create investment limitations. Thus, at this juncture, it is unclear whether the new rules will be limited to restricting Chinese investments with national security implications or if Treasury will propose conditions that implicate a broader spectrum of transactions involving Chinese firms.

The USTR report highlights Chinese acquisitions in seven sectors of the US economy: (1) aviation; (2) integrated circuits; (3) information technology and electronics; (4) biotechnology; (5) industrial machinery and robotics; (6) renewable energy; and (7) automotive. Thus, new investment restrictions could target investment in those sectors. New investment restrictions could conceivably affect relationships between US companies and Chinese investors that take place outside the United States, as well as proposed US investments in China. Companies engaged with Chinese counterparts in investment activities or proposing this kind of engagement will want to watch closely for impacts on their plans.

Retaliation Risk

China has announced its intention to fight back, if the US imposes new trade and investment restrictions and already released a list of US products, including soybeans, automobiles, aircraft and chemicals, that would be targeted for retaliatory tariffs. China's ambassador has said that China does not seek a trade war, but will protect China's interests if the US starts one, and Chinese social media are already teeing up the possibility of an American product boycott. China has also announced retaliation for the steel and aluminum tariffs the United States recently imposed pursuant to a national security investigation under Section 232 of the Trade Expansion Act of 1962. Those retaliatory tariffs include pork products, various tree nuts, wine, fresh and dried fruits, stainless steel pipes and tubes, and aluminum scrap.

If the US imposes investment restrictions, China is likely to take action in kind, potentially limiting US investments and acquisitions in China, or imposing additional limitations, formal or informal, on existing US investments.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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