New Section 301 Expanded Tariffs and Exclusions Process Bring Danger and Opportunities for U.S. Importers and Consumers

Introduction

Listening to companies that predicted chaos within their supply chains if there were not some kind of exemption process for the Section 301 tariffs, the U.S. Trade representative has announced a process for importers to petition for waivers for specific products covered by the Section 301 special tariffs. While this newly announced exemptions process gives companies that rely on targeted imports from China the ability to seek company-specific relief from the Section 301 special tariffs, these prospects for relief were overshadowed by the nearly simultaneous announcement that the Administration is levying additional Section 301 tariffs on a massive $200 billion in additional Chinese imports.

This Client Alert describes the current state of play for the Section 301 tariffs and outlines strategies that importers and consumers of Chinese goods can take to help deal with both the newly announced Section 301 tariffs (10 percent for the new $200 billion in trade) and the initial target list (25 percent).

Background

The Trump Administration has imposed duties under Section 301 of the Trade Act of 1974 to counter what the Administration claims is China’s forced technology transfer rules and other industrial policies that are designed to give Chinese companies access to the R&D and business know-how of U.S. companies that operate in China.¹ The duties have been imposed to date on $34 billion of Chinese imports at the rate of 25% of the ad valorem value of the imported merchandise (with the U.S. Trade Representative being in the middle of choosing the goods for an additional $16 billion in goods).

On July 6, 2018 China responded by imposing increased duties on goods of the United States. In light of what Mr. Lighthizer has called China’s “retaliation and failure to change its practices,”² on July 10, 2018 the U.S. Trade Representative proposed a modification to maintain the original $34 billion and the proposed $16 billion actions while also taking further action on an additional $200 billion of Chinese imports (this time at a 10% ad valorem duty rate).³

Under the Section 301 process, these special tariffs are imposed on entire categories of merchandise, as defined by the 10-digit harmonized tariff system code. Whereas the initial $34 billion action and the proposed $16 billion action together would account for products classified under 1102 tariff lines (10-digit HTS sub-headings), the new additional tariffs announced account for a significantly larger number of products classified under 6031 tariff lines.⁴

Many U.S. companies, however, have argued that their particular imports are not available from U.S. producers – or even from sources other than China – and thus should be exempted. Others have argued that their own products are not appropriate targets for retaliation as they have not been the subject of the complained about Chinese IP practices or because of the importance of their products to the U.S. economy. To handle these complaints, the U.S. Trade Representative has established two recourses for U.S. importers and consumers. The first – related to the initial set of duties – is to give importers and consumers the right to seek an exclusion on a product-by-product and company-specific basis. The second – related to the newly announced set of 6031 tariff lines – allows companies to comment on the selected tariff lines regarding whether they are appropriate for inclusion in the newly announced round of Section 301 tariffs. (A similar comment period on the second set of tariff lines is now coming to an end.) Each action is discussed in turn below.

Newly Announced Exclusions Process

The U.S. Trade Representative has announced a Section 301 tariff exclusion process, which allows U.S. companies to petition the government for specific products to be exempted from the duties. According to the U.S. Trade Representative, the government is “providing an opportunity for the public to request exclusion of a particular product from the additional duties to address situations that warrant excluding a particular product within a subheading, but not the tariff subheading as a whole.”⁵

The U.S. Trade Representative has indicated that in determining which requests to grant it will consider a number of factors, including whether the product in question is available from non-Chinese sources and whether the new 25 percent Section 301 tariff would cause “severe economic harm” to the importer or other U.S. interests.

Like the section 232 exclusions process, the process is envisioned as requiring exclusions requests on a company-specific basis for specific products (although trade associations also can file). Unlike the section 232 process, however, the process here will be open only for a limited time. Companies seeking exclusions must file the request within ninety days (i.e., by October 9, 2018).⁶ Following a public posting of the request on Regulations.gov (under docket number USTR-2018-0025), the public will have fourteen days to file a response to the request. After the close of that fourteen-day period, any interested person will have any additional seven days to reply (either in support of or in opposition to the request).⁷ The last rebuttal stands in contrast to the section 232 exclusions process, where there is only an opportunity to file an exclusions request and to respond a single time.⁸

If the U.S. Trade Representative issues an exclusion, it will apply for one year (retroactive to July 6th).⁹ This means that companies that are filing an exclusions request while actively importing the product should carefully keep track of all entries, since they may need to seek a refund on an individual-entry basis of any section 301 tariffs paid should the exclusion request succeed.

At this point it is not clear how the process will work internally. Such questions as whether the U.S. Trade Representative will perform the evaluations (when it does not really have the personnel to do so), what criteria it will apply, and whether it will in fact be able to complete the evaluations on a timely basis are at this time unknown. The most obvious solution – to farm out the exclusions evaluation to the Department of Commerce, which already is building an expertise in evaluating Section 232 exclusion requests – is quite problematic. The ongoing section 232 exclusions process – already up to 25,000 or so exclusion requests – is bogged down and unlikely to yield timely exclusions. Notably, unlike with the Section 232 exclusions process, the USTR has not indicated any timetable for providing its response to any filed requests.

Companies that import products from China should carefully review the various lists of products to determine whether their imports are covered by the imposed or prospective tariff lists. Companies also should evaluate whether they have valid reasons to seek an exclusion. Potential winning arguments can include the lack of any U.S. or non-Chinese suppliers of certain components, the need to import specialized forms of the merchandise that are not reasonably available from other sources (such as material made with dedicated tools and dies), a national security interest in the use of the product imported from China, the support of large downstream U.S. value added by the Chinese imports, the support of a large amount of downstream product exports, the lack of any connection of the particular Chinese imports with any of the alleged Chinese intellectual property intrusions, that the particular imports are not “strategically important or related to the ‘Made in China 2025,’” or any demonstrable economic hardship flowing from the tariffs, particular for small- and medium-sized firms.

How to Submit an Exclusions Request

Both individual companies and trade associations may submit requests for exclusions. Requests can be made based upon public or confidential information; if confidential information is submitted then the request must also submit a public version (with only the latter being posted on regulations.gov). Only one product can be addressed per exclusions request. The file name must include the ten-digit subheading of the HTS applicable and the name and person of the company or person submitting the request. Any exclusion request “must specifically identify a particular product, and provide supporting data and the rationale for the requested exclusion.” Specifically, the request “must include the following information”:

• The ten-digit subheading of the HTS applicable to the exclusion request.
• Identification of the particular product “in terms of the physical characteristics (e.g., dimensions, material composition, or other characteristics) that distinguish it from other products within the covered 8-digit subheading.”
• The “annual quantity and value of the Chinese-origin product that the requester” or trade association purchased “in each of the last three years.”
• A certification that the information submitted is complete and correct.¹⁰

In addition, each exclusion request “should address” the following factors:

• Whether the particular product is available only from China. In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
• Whether the imposition of additional duties on the particular product would cause severe economic harm to the requester or other U.S. interests.
• Whether the particular product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.¹¹

Notably, the USTR specifically states that it “will not consider requests that identify the product at issue in terms of the identity of the producer, importer, ultimate consumer, actual use or chief use, or trademarks or tradenames.”¹² These restrictions will make it difficult or impossible to argue that companies that import from affiliates, subsidiaries, or joint ventures located in China should be exempted solely because the company brings over branded products or those that it has tailored to its own use in downstream production. Instead, companies will need to develop information grounded in the general product characteristics to support an exclusions request.

The Federal Register notice indicates that the USTR will be placing a request form on the USTR website under “Enforcement/Section 301 investigations” and on regulations.gov in the “Supporting Documents” section; the form can also be found on the USTR website.¹³ The USTR “strongly encourages interested persons to use the form to submit requests.”

After a requests is posted on regulations.gov under Docket USTR-2018-0025, interested parties will have fourteen days to file a response. After the fourteen-day response period has ended, interested parties will then have an additional seven days to reply to those initial responses submissions, either in support of or opposition to the request. No timing is set as to when the USTR will respond, other than a promise that the “USTR will periodically announce decisions on pending requests.”

How to Seek Clarification

According to the Federal Register notice, companies seeking further information should contact USTR Assistant General Counsel Arthur Tsao or Director of Industrial Goods Justin Hoffmann at (202) 395–5725 or [email protected] for Customs-related questions. U.S. Customs also has issued guidance to help importers determine how to deal with the tariffs. According to U.S. Customs guidance:

• Any product covered in Annex A of the U.S. Trade Representative notice of Action Pursuant to Section 301 is required to pay the special duties, as per the initial notice. Any special section 301 tariffs are entirely in addition to normal tariff duties.
• The additional tariffs are imposed by reporting two tariff classifications: the normal tariff found under chapters 1-97 of the Harmonized Tariff Schedule and an additional tariff classification to account for the section 301 tariffs (HTS 9903.88.01).
• The application of the duties is based upon the country of origin of the goods (i.e., where they were last substantially transformed), not the country of export. This means that the duties cover any Chinese goods even if they are first shipped to another country.
• Any goods that are entered into a foreign trade zone generally must be admitted using “privileged foreign status” pursuant to 19 C.F.R. 146.41, meaning that the products will be subject to any applicable duty rates or quantitative limitations related to the classification. This is to prevent companies from using foreign trade zones to try to evade any payment of the section 301 duties.¹⁴
• Unlike with the section 232 duties, duty drawback is possible for section 301 duties.

Additional Section 301 Tariffs

The existing section 301 duties are not the only minefield that U.S. imports of components from China need to navigate. The U.S. Trade Representative currently is soliciting comments and is conducting a hearing regarding an additional $16 billion of annual trade with China, and is beginning a third round of comments on the newly announced $200 billion in Section 301 tariffs.

For the second round of section 301 tariffs (the proposed $16 billion in annual trade, as found in Annex C of the U.S. Trade Representative’s Federal Register notice), the U.S. Trade Representative is looking to finalize a second set of HTS tariff lines that will also be subjected to 25 percent tariffs.¹⁵ Further, the President has directed that the U.S. Trade Representative identify an additional $50 billion in Chinese imports – making for a total of $100 billion in annual trade after the first two rounds are completed. This third list covers an additional 1102 separate U.S. tariff lines, with a focus on products from industrial sectors that “contribute to or benefit from the “Made in China 2025” industrial policy, including industries such as aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles.”¹⁶

For the third round of tariffs, the USTR has established the following timing for submissions:

• July 27, 2018: Due date for filing requests to appear and a summary of expected testimony at the public hearing, and for filing pre-hearing submissions.
• August 17, 2018: Due date for submission of written comments.
• August 20-23, 2018: The Section 301 Committee will convene a public hearing in the main hearing room of the U.S. International Trade Commission, 500 E Street SW, Washington DC, 20436 beginning at 9:30 am.
• August 30, 2018: Due date for submission of post-hearing rebuttal comments.

As with the first two rounds of tariffs, the comments can cover the full range of issues raised by implementing the $200 billion in tariffs, including with regard to whether the products chosen achieve the stated goal. USTR specifically requests comments regarding:

• The propriety of the listed tariff lines, including whether any listed tariff lines should be retained or removed.
• Whether tariff lines not currently on the list should be added.
• The level of the increase, if any, in the rate of duty.
• The appropriate level of trade that should or should not be covered by additional duties.
• Whether imposing duties on a particular tariff line or proposed tariff line would be practicable or effective to eliminate or counteract China’s acts, policies and practices related to technology transfer, intellectual property, and innovation.
• Whether maintaining or imposing duties on a particular tariff line would cause disproportionate economic harm to U.S. interests, including small- or medium-size businesses and consumers.

The USTR will make its final determination after reviewing the comments. Comments on the first round resulted in the removal of 515 tariff lines from the initial list of 1,333 proposed tariff lines, illustrating that the comments were taken seriously. Whether similar changes will occur in this go-around, however, is not yet known. Unlike the first go-around, which involved only around 10 percent of Chinese imports, the current proposal adds $200 billion in annual trade, making for a total that is near half of total annual imports from China. In these circumstances, there is a lot less leeway for mixing and matching tariffs while minimizing the harm to U.S. economic interests.

Not to be overlooked is that the process also allows an opportunity for U.S. companies to increase tariffs, including on U.S.-based competitors that rely on Chinese inputs. Thus, the exclusions process is useful not only for companies looking to avoid a sharp increase in their input costs, but also as a means of “leveling the playing field” for companies that believe their competitors are benefiting from low-cost inputs that may have benefited from the types of intellectual property issues that are the target of the Section 301 process. Companies in this posture might want to consider participating in the third round hearing and comment period.

Coping with the Section 301 Tariffs

In addition to looking for opportunities to request a section 301 exclusion, or to comment on the latest round of tariffs, companies should consider evaluating these trade strategies to mute the impact of these tariffs:

• Evaluate When Acting As Importer of Record. Although the section 301 tariffs are aimed at Chinese manufacturers, the duties imposed actually are collected from the importer of record as a percentage of the ad valorem value of each entry of the subject merchandise. Importers who are not paying attention to the impact of the new section 301 duties can find themselves on the hook for the full payment of these duties. Companies need to be aware of contractual arrangements where they have agreed to be the importer of record or have agreed to reimburse for the payment of any Customs duties.
• Establish Contingency Measures in Long-Term Supply Agreements. Companies highly reliant on imported goods need to evaluate whether their long-term contracts cover the contingency of which party acts as the importer of record, the delivery terms (terms of delivery like CIF and FOB can impact who is responsible for paying for duties), whether reimbursement of duties occurs, whether the possibility of increasing tariffs is even addressed, and whether the parties have the right to terminate the contract based upon the imposition of unanticipated duties. Force majeure clauses may not meet legal requirements for contract termination on the basis of unanticipated duties. Companies finding themselves unexpectedly paying section 301 duties should evaluate whether they have legal options to update their contractual terms, particularly as contracts come up for renewal.
• Check Entries Carefully Against Orders. The new procedures announced by Customs depend upon self-classification of goods under the new section 301 rules. Failure to properly declare the new tariff classification where required will result in both a back-bill for the duties owed (and any interest), but also additional penalties. Relying on customs brokers or freight forwarders to handle the new duties without oversight often can be inadequate, as these third parties generally are not given the responsibility of knowing what products are planned for importation. Once the goods have reached the customs territory of the United States, it is too late to do anything because the duties become owed upon entry. Because the liability of customs brokers is generally limited by contract to the modest value of the fee paid for the processing of the goods, companies should take steps to independently follow which goods become subject to new orders as part of their customs compliance.
• Know the Correct Classification of Entries. Section 301 duties are imposed based upon the HTS tariff line. Thus, the liability for duties pre-supposes and accurate HTS classification. In any situation where entries are in a gray area, special attention should be paid to get the classification correct and determine whether the good falls within the scope of the order. Some orders have complicated scopes that can make classification, such as the aluminum extrusions order (which is the subject of approximately eighty scope determinations by the DOC). If certainty is not possible through self-classification, importers should consider filing a request for an advisory opinion to get a binding ruling from Customs.
• Be Aware of Potential Circumvention Red Flags. Because duty rates can be high, some less scrupulous exporters will misclassify their goods, such as by claiming different product attributes or classifications than in fact exist, by claiming an erroneous country of origin, or otherwise. Allegations of Chinese exporters using such strategies to avoid antidumping or countervailing duty orders aimed at China are common. Any importer noticing red flags that indicate potential circumvention should check into it before CBP does.
• Conduct a Risk Assessment Review of Critical Supply Contracts that May Be Im-pacted. Work with the company’s sales and procurement teams to identify key long-term contracts and purchase orders that will be impacted by the new section 301 tariffs. Specific contract terms that should be examined include provisions that pertain to: (a) raw materials increases and any applicable pricing formulas; (b) other requests for cost increases; (c) force majeure; (d) notice requirements; and (e) termination rights.
• Investigate Alternative Sources of Supply. As noted above, the duties are based upon the country of manufacture, not whether the products are directly exported from China. If there are alternate sources available, the company many work to line up and qualify a replacement supplier. However, this many not be feasible if the goods are specially manufactured products that require testing and a lengthy validation process. The company should ascertain how much product it has in stock and identify when an interruption in supply would cause a shutdown in the manufacturing line. The company can then determine whether its best course of action is to acquiesce to the payment of the section 301 duties or to proceed with qualifying an alternate supplier.

*   *   *

Foley’s International Trade & National Security attorneys have been representing both U.S. and foreign companies in international trade proceedings, dating all the way back to the last international trade war of the 1980s/1990s. Please contact the authors of this international trade alert if you would like to learn more about the section 232 and 301 exclusions processes or need to prepare an exclusion request under either of these two laws. You may also contact the authors if you would like to discuss the pitfalls and opportunities posed by the record number of antidumping and countervailing duty cases that are being filed against exports to the United States. For companies that believe that they have been impacted by unfair trade, the authors can provide an assessment questionnaire that will help determine whether a potential antidumping or countervailing duty case is merited. You can contact Greg Husisian, the chair of Foley’s International Trade and National Security practice, at [email protected] (202.945.6149) or Bob Huey at [email protected] (202.295.4043).

For issues relating to international regulatory matters (U.S. export controls or economic sanctions), please contact Greg Husisian at [email protected] (202.945.6149) or Christopher Swift at [email protected] at (202.295.4103).

————————-

¹ According to the Presidential Memorandum of Section 301 Action, the Chinese actions of concern include the use of foreign ownership and joint venture restrictions to require or pressure technology transfer to Chinese entities, the use of the administrative review and licensing procedure to force technology transfers, the use of substantial restrictions on U.S. firms’ investments and activities, restrictions on technology licensing terms, the use of systematic investments in, and acquisition of, U.S. companies and assets in a campaign of gaining access to cutting-edge technologies and intellectual property, and unauthorized intrusions into the computer networks of U.S. companies. See “Presidential Memorandum on the Actions by the United States Related to the Section 301 Investigation” (Mar. 22, 2018), https://www.whitehouse.gov/presidential-actions/presidential-memorandum-actions-united-states-related-section-301-investigation/.

² Statement by U.S. Trade Representative Robert Lighthizer on Section 301 Action,” https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/july/statement-us-trade-representative.

³ See “Request for Comments Concerning Proposed Modification of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation” https://ustr.gov/sites/default/files/301/2018-0026%20China%20FRN%207-10-2018_0.pdf.

⁴ Id. 

⁵ See “USTR Releases Product Exclusion Process for Chinese Products Subject to Section 301 Tar-iffs,” https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/july/ustr-releases-product-exclusion. Although the procedures process was announced before the most recent $200 billion tariff action, it is presumed that these procedures will be applicable to the newest list of HTS subheadings as well.

⁶ Office of the United States Trade Representative, “Procedures to Consider Requests for Exclusion of Particular Products from the Determination of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation,” 83 Fed. Reg. 32,181, 32,182 (July 11, 2018), https://www.gpo.gov/fdsys/pkg/FR-2018-07-11/pdf/2018-14820.pdf. 

⁷ Id.

⁸ Id.

⁹ Id. 

¹⁰ Id.

¹¹ Id.

¹² Id. 

¹³ The form is in the format of a fillable PDF form and is located on the USTR website here: https://ustr.gov/sites/default/files/enforcement/301Investigations/China%20301%20Product%20Exclusion%20Form.pdf.

¹⁴ See U.S. Customs and Border Protection, “Section 301 Trade Remedies to be Assessed on Cer-tain Products from China effective July 6, 2018,” https://www.cbp.gov/trade/programs-administration/entry-summary/section-301-trade-remedies-be-assessed-certain-products-china-effective-july-6-2018.

¹⁵ See Office of the Office of the U.S. Trade Representative, “Notice of Determination and Request for Public Comment Concerning Proposed Determination of Action Pursuant to Section 301: Chi-na’s Acts, policies, and Practices Related to Technology Transfer, Intellectual Property, and Inno-vation,” 83 Fed. Reg. 28,710 (June 20, 2018), https://www.gpo.gov/fdsys/pkg/FR-2018-06-20/pdf/2018-13248.pdf.

¹⁶ See Office of the United States Trade Representative, “USTR Issues Tariffs on Chinese Products in Response to Unfair Trade Practices,” https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/june/ustr-issues-tariffs-chinese-products.