Although the proposed next round of U.S. tariffs on $250 billion in Chinese goods set to go into force on March 2nd has been suspended indefinitely, negotiations between China and the Trump administration are far from final. Thus, those wide-sweeping tariffs may be imposed at some point in the near future. In addition, U.S. importers area already dealing with two rounds of tariff increases on a wide range of Chinese goods.

I’ve previously discussed some of the reasons why the U.S. has taken such a strong stance in its trade conflict with China.  See the article here, which was the “why” regarding the current U.S./China trade conflict.

To help U.S. importers better understand the current punitive tariffs, this article discusses the “what, when and how” of the U.S. tariffs on Chinese goods. In addition, this article discusses some strategies for how U.S. importers can avoid them – or at least minimize their impact.

Background in the Recent China Tariffs

On August 18, 2017, the Office of the United States Trade Representative initiated an investigation of China under Section of the Trade Act of 1974 (which is why these are called “Section Tariffs“). The investigation was initiated under the direction of the Trump Administration to determine if the Chinese governments acts, policies, and practices on technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.

Under Section of the Trade Act of 1974, the U.S. Trade Representative has the authority to review and investigate unfair trade practices aimed at the United States. If USTR finds there are restrictive trade practices, the U.S. President has the authority to take appropriate actions to eliminate the restrictive trade practices.

According to the USTR website, the investigation found that:

  1. China uses foreign ownership restrictions, including joint venture requirements, equity limitations, and other investment restrictions, to require or pressure technology transfer from U.S. companies to Chinese entities. China also uses administrative review and licensing procedures to require or pressure technology transfer, which, inter alia, undermines the value of U.S. investments and technology and weakens the global competitiveness of U.S. firms.
  2. China imposes substantial restrictions on, and intervenes in, U.S. firms’ investments and activities, including through restrictions on technology licensing terms. These restrictions deprive U.S. technology owners of the ability to bargain and set market-based terms for technology transfer. As a result, U.S. companies seeking to license technologies must do so on terms that unfairly favor Chinese recipients.
  3. China directs and facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and to generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.
  4. China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies. These actions provide the Chinese government with unauthorized access to intellectual property, trade secrets, or confidential business information, including technical data, negotiating positions, and sensitive and proprietary internal business communications, and they also support China’s strategic development goals, including its science and technology advancement, military modernization, and economic development.

The full report is available on the USTR website.

As a result, the President instructed USTR to take the following actions:

  1. Tariffs – The President has instructed the Trade Representative to publish a proposed list of products and any tariff increases within 15 days of March 22, 2018. With a final list of products to be published after notices are published and industry has the opportunity to comment.
  2. WTO dispute – The President has instructed the Trade Representative to pursue a dispute settlement in the World Trade Organization (WTO) to address China’s discriminatory technology licensing practices.
  3. Investment restrictions – The President has directed the Secretary of the Treasury to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.

Products Covered

A wide range of Chinese products are involved in these punitive tariffs. There are three lists of products that have an additional tariff under Section. The lists are available at the links below:

_________________________________________________________________________

Value of Chinese Imports      Duty Rate             Effective Date                        Exclusion Request Deadline

List 1. $34 billion                    25%                      July 06, 2018                         October 09, 2018

List 2. $16 billion                    25%                      August 23, 2019                    December 18, 2018

List 3. $200 billion                 10%(25%)           September 24, 2018             TBD

_________________________________________________________________________

On January 11, 2019, USTR announced that an exclusion process would not be initiated on List 3 unless negotiations with China fail and the tariff increases to 25 percent. The tariff increase was originally scheduled for January 01, 2019 but was delayed for 90 days while the Chinese and U.S. governments engaged in trade talks. The duty increase to 25 percent is tentatively scheduled to go into effect on March 02, 2019.

Exclusions request for List 3 cannot be submitted until the process is published in the Federal Trade Register.

When submitting an exclusion request, the importer or other interested parties should address the following:

  1. Is the product available in the United States?
  2. Will the duty cause severe economic hardship to the requestor or other U.S. parties?
  3. Is the product strategically important to China’s “Made in China 2025” program?

Exclusions Granted

On December 21, 2018, USTR submitted for publication a Federal Register Notice with a list of products excluded from List 1 of the Section tariff for China.

The Federal Register Notice includes approximately 1,000 individual exclusion requests that involve 21 separate HTS numbers.  A complete list of the HTS numbers and product descriptions that qualify for this exclusion are available here.

NOTE: Once granted, the exclusions are available to anyone whose products meet the description of the products in this notice, regardless of whether the company applied for an exclusion request or not.  

Mitigating the Section Tariff

Your company may be able to implement the following strategies and avoid paying the additional Section tariff.

  1. Review the HTS and descriptions of the exclusions already granted and determine if your products fall under the description or HTS. It is important to note that any exclusions which are granted are available to anyone, not just the companies who apply for an exclusion request.
  2. Review the HTS numbers you use to import your products. It is possible that your products were misclassified and don’t fall under List 1 through 3.

Of course, a company should not change the HTS number of their product merely to avoid paying the Section tariff. But it makes sense to review all product HTS classifications and determine whether a different HTS classification might be more appropriate.

  1. Are you exporting the imported product? Or are you further manufacturing the product? You may qualify for drawback. Drawback is available for the Section duties paid to U.S. Customs.
  2. Find a source for your product in a country other than China. The testing and product qualification of a new supplier takes time, so get started now in looking for alternative sources for the products you import from China that fall under the Section tariff.
  3. If you are importing raw material or components, you may be able to further process the raw material or component in a third country to substantially transform the product.

The country of origin will remain China unless the product undergoes a substantial transformation (i.e., a change in name, character and use). It would be illegal for a company to ship a product from China to a third country and declare the wrong Country of Origin to avoid paying the Section tariff.

My international trade team at Klemchuk LLP is currently working with several clients to address the challenges presented by these Section 301 tariffs.

For more information on Jim Chester and the Klemchuk LLP international business and trade practice, please click here.

This article was reposted from a blog post by Cesar Reyna, International Trade Consultant for Klemchuk LLP and CEO of TCS Group.

About the firm:

Klemchuk LLP is a litigation, intellectual property (IP), and business law firm, located in Dallas, TX.  The firm offers comprehensive legal services including litigation and enforcement of all forms of IP as well as registration and licensing of patents, trademarks, trade dress, and copyrights.  The firm also provides a wide range of technology, Internet, e-commerce, and business services including business planning, formation, and financing, mergers and acquisitions, business litigation, international business, import/export, data privacy, and domain name dispute resolution.  Additional information about the IP firm and its IP attorneys may be found at www.klemchuk.com.