News
August 10, 2018

Section 301 Update: Expanded Tariffs and Exclusion Process

Advisory

WHAT YOU NEED TO KNOW:

  • The Trump Administration has already imposed additional tariffs of 25 percent on approximately $34 billion worth of imports from China, effective July 6, 2018.
  • The Administration recently announced that it will impose 25 percent tariffs on an additional $16 billion worth of Chinese imports, effective August 23, 2018.
  • If negotiations with China continue to falter, a third round of tariffs could soon hit an additional $200 billion in imports from China with as high as 25 percent duties.
  • China has responded with retaliatory tariffs on about $50 billion of US goods and has said it will add tariffs to an additional $60 billion of US products, if the US goes ahead with the third round of its proposed tariffs.
  • The articles subject to the latest proposed US tariffs include a wide range of raw materials and inputs relied on by US manufacturing, as well as consumer products and building materials.
  • The Administration has created an exclusion process for the first tranche of tariffs (on $34 billion of products). US companies that rely on Chinese imports can seek to exclude certain articles from these new tariffs.The Administration also has announced its intention to permit exclusion requests for goods in the second tranche.

Background

Pursuant to Section 301 of the Trade Act of 1974, the Trump Administration launched an investigation on August 18, 2017 into Chinese policies and practices that threaten US intellectual property and trade secrets. After completing its investigation and identifying a number of unfair practices by China, the Trump Administration announced on March 22, 2018, that it intended to impose trade penalties on approximately $50 billion worth of imports from China.

Following a round of public comment on a list of articles targeted for tariffs, the Trump Administration imposed 25 percent tariffs on approximately $34 billion in Chinese imports, effective July 6, 2018.

In addition to that first round of tariffs, the Trump Administration announced on June 15, 2018 a second list of approximately $16 billion of Chinese imports on which it proposed to impose 25 percent tariffs. Following a round of public comment on this second list of articles targeted for tariffs, the Administration announced on August 7, 2018 that it will impose 25 percent tariffs on virtually all of the approximately $16 billion in additional Chinese imports covered by this second list. These tariffs will go into effect on August 23, 2018.

China retaliated with tariffs on $50 billion of US products, and in response, the Trump Administration announced it would impose tariffs on an additional $200 billion worth of Chinese imports. USTR is currently taking public comment on that third list of Chinese articles targeted for new tariffs.

Although the Trump Administration originally proposed subjecting this third list of articles to 10 percent tariffs, on August 1, 2018 USTR announced that the Administration had directed USTR to consider increasing the proposed tariffs on the third list from 10 percent to 25 percent. Together, these three lists of imports encompass half of all US trade with China.

China responded with its own new list of US goods worth $60 billion to be subject to new tariffs ranging from 5 to 25 percent if the US moves forward with this third tariff proposal. This would impose tariffs on most of the US goods going to China.

As part of the Section 301 proceeding, USTR has announced a process for importers to petition to have specific products excluded from the first tranche of Section 301 special tariffs and has stated that the second tranche of tariffs will also be subject to exclusions. The exclusion process gives companies that rely on imports from China the opportunity to seek product-specific exclusions from the Section 301 special tariffs.

Many US companies have expressed concern that key imports of essential inputs are not available from non-Chinese sources. Companies have two opportunities to seek relief from the proposed tariffs. The exclusion process offers a potential channel for relief regarding specific products on the first and second lists, if a persuasive showing can be made. There is also an open comment period offering an opportunity to make oral and written presentations regarding the proposed $200 billion list. (The comment period for the first and second lists has expired.)

This update highlights strategies that companies relying on Chinese imports for their supply chain can take to deal with the Section 301 tariffs.

Coping with Section 301 Tariffs

If a company's imports are on the first or second list, companies should consider whether to seek an exclusion. If products are on the third list, companies should consider providing comments to USTR, as outlined below.

In addition to looking for opportunities to request an exclusion, or to comment on the latest round of tariffs, companies should also evaluate strategies to reduce the impact of the tariffs. These strategies could include finding new sources of import supply, shifting manufacturing or assembly operations to avoid tariffs, or investigating the possibility of assembly or further manufacture in a third country.

Arnold and Porter's trade practice can help your company evaluate the impact of tariffs and assist with exclusions, comments or supply chain strategy.

Commenting on Additional Section 301 Tariffs on $200 billion of Chinese Goods (Third List)

USTR is soliciting comments and holding a public hearing regarding the scope of the third proposed list of Chinese imports to be hit with tariffs and the appropriate tariff rate to be imposed. While USTR had originally proposed a tariff rate of 10 percent for this list, on August 1, 2018. USTR announced it was considering changing the proposed tariff rate to 25 percent. USTR is accepting comments on the tariff rate, in addition to views on the list of articles to be subject to tariffs. USTR has established the following timing for comments.

August 13, 2018:

Due date for filing requests to appear and a summary of expected testimony at the public hearing, and for filing pre-hearing submissions.

September 6, 2018:

Due date for submission of written comments.

August 20–23, 2018:

Public hearing.

September 6, 2018:

Due Date for Submission of post-hearing rebuttal comments.

USTR will decide on a final list of articles to be subject to the tariffs after reviewing the comments. Comments on the first round of proposed tariffs resulted in the removal of 515 of 1,333 proposed tariff lines, while comments on the second round of proposed tariffs resulted in the removal of only five of 284 proposed tariff lines. It is unclear whether significant changes will be made following public comment to the third round of tariffs, currently proposed to apply to 6,031 tariff lines.

The Exclusion Process

USTR has established a process by which US stakeholders can seek to have specific products excluded from the Section 301 duties. In evaluating exclusion requests, USTR has indicated that it will consider a number of factors, including:

  • whether the product in question is available from non-Chinese sources;
  • whether the new 25 percent Section 301 tariff would cause "severe economic harm"; and
  • whether the particular product is strategically important or related to Chinese industrial policies, such as "Made in China 2025".

If an exclusion is granted it will apply for one year and be retroactive to the date the duties were imposed (i.e., July 6, 2018 for the first round of duties and, likely August 23, 2018 for the second round).

Exclusion will be accepted from individual companies and trade associations, but only one product can be addressed per exclusions request. Critically, the request "must specifically identify a particular product" both in terms of the applicable ten-digit subheading of the Harmonized Tariff System applicable and based on the physical characteristics of the product (e.g., dimensions, material composition, or other physical characteristics). Requestors will need to provide good information regarding distinguishing product characteristics to support an exclusions request.

Exclusions will not be granted based on the identity or nationality of the producer, trade names, or end uses.

Companies that desire exclusions for products covered by the first list of tariffs must submit exclusion requests by October 9, 2018. The exclusion requests will be posted online and the public will have 14 days to file a response to the request. After the close of that 14-day period, any interested person will have any additional seven days to reply (either in support of or in opposition to the request).

On August 7, 2018, the Administration announced that the exclusion process applicable to products covered by the second round of tariffs will be announced in the forthcoming formal notice of the tariff action to be published in the Federal Register. The same type of exclusion process may also apply to the third list once it is finalized.

*Leslie Bailey contributed to this Advisory. Ms. Bailey is a graduate of Brooklyn Law School and is employed at Arnold & Porter's Washington, DC office. Ms. Bailey is admitted only in New York, New Jersey, and Pennsylvania. She is not admitted to the practice of law in Washington, DC.

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