Overview
Following an investigation under Section 301 of the Trade Act of 1974 (Section 301), the United States Trade Representative (USTR) has now issued four lists of products on which additional tariffs have been or may be imposed when imported from China:
- List 1: 25% duties on $34 billion in imports effective as of July 6, 2018.
- List 2: 25% duties on $16 billion in imports effective as of August 23, 2018.
- List 3: 10% duties on $200 billion in imports effective as of September 24, 2018, increased to 25% effective as of May 10, 2019.
- List 4: duties on $300 billion in imports, broken out into two sub-lists:
Companies have raised a number of practical questions about the implementation of these unprecedented trade actions. The most frequently asked questions (FAQs) we have received, and our views, are provided below.
1. How do I know if my import is subject to Section 301 duties?
2. How is duty rate calculated, and on what value is the duty applied?
3. Who is responsible for paying the Section 301 duty?
4. Can foreign producers reimburse Section 301 duty payments made by importers?
5. How long are the Section 301 duties projected to remain in effect?
6. How will Section 301 duties be treated in antidumping (AD) proceedings?
7. I am an importer; how will the Section 301 duties affect my continuous entry bond?
8. Is there a process to apply for exclusions from Section 301 duties, and if so, how does it work?
9. Can exporters obtain duty drawback for Section 301 duties?
10. Are Section 301 duties applicable to goods admitted into a foreign trade zone (FTZ)?
11. Can goods subject to Section 301 duties be entered under temporary importation in bond (TIB)?
12. What are some strategies to mitigate the impact of the Section 301 duties?
1. How do I know if my import is subject to Section 301 duties?
Each list issued by USTR is comprised of Harmonized Tariff System of the United States (HTSUS or HTS) numbers at the 8-digit level. HTSUS numbers are the codes applied to every product entered into the United States at the time of entry to determine appropriate normal customs duties and other requirements.
Section 301 duties are applied to merchandise entered under these HTSUS categories if the product has a China country of origin. US Customs and Border Protection (CBP) has clarified that for purposes of determining whether Section 301 duties apply, it will use its normal country of origin rules. These rules are based on the concept of "substantial transformation." That is, country of origin is determined by the country in which the last "substantial transformation" occurred prior to entry into the United States. Section 301 duties are applied on the basis of country of origin, not country of exportation, meaning that Chinese-origin goods shipped through a third country are still potentially subject to Section 301 duties. In a recent ruling, CBP confirmed that, even for goods that are processed in Canada or Mexico, and normally would be eligible for NAFTA duty-free treatment, CBP will require a separate, additional analysis under substantial transformation to determine whether the goods are subject to the 301 duties.
Imports of goods with a country of origin in Taiwan, Hong Kong, and Macau are not subject to Section 301 duties.
Entries under the Section 321 "de minimis" exception, covering single entries with an entered value of less than $800, are not covered by Section 301 duties.
2. How is duty rate calculated, and on what value is the duty applied?
The additional Section 301 duty is added to any normal duties or antidumping and countervailing duties (AD/CVD) already applicable to the merchandise. For example, if a product on List 1 is subject to a 5% normal customs duty, that product is now subject to a 30% duty (i.e., 5% normal duty plus 25% Section 301 duty).
This duty rate is then applied to entered value, as declared by the importer to CBP. This is the same basis upon which normal customs duties are applied. There are only a few specific methods permitted for the proper calculation of entered value. However, generally speaking, and in the case of an arm's length sale to the United States, entered value is the purchase price (minus international freight) from the foreign producer to the US buyer. In the absence of such sale, importers can elect to use other valuation methodologies.
To review the proper calculation of entered value, we recommend that parties review CBP's documents on appropriate valuation, proper deduction of freight and other costs, and valuation of shipments between related parties.
3. Who is responsible for paying the Section 301 duty?
The importer of record is responsible for paying all duties to CBP, including Section 301 duties. The company named as importer on the official entry documents (Customs Form 7501 or equivalent) will be held liable by CBP for the tariffs. Downstream purchasers are not responsible for paying such duties to CBP.
Companies in a purchase transaction involving products covered by Section 301 duties can negotiate with each other as to which company will act as the importer. Furthermore, companies can negotiate over whether there should be a repayment, indemnification, or sharing of this additional duty liability. Companies acting as importer also can attempt to negotiate for a price benefit for taking on the additional tariff cost and legal obligation.
Under US law, not only is the importer of record responsible for payment of the duties, but also for any interest or penalties if CBP finds that duties should have been paid but were not. The US importer of record is responsible to CBP for complete and accurate declaration of all information related to the import transaction, especially the HTS number, value and country of origin. The importer of record is also responsible for maintaining records to demonstrate that all information declared was determined in a manner consistent with US laws and regulations.
4. Can foreign producers reimburse Section 301 duty payments made by importers?
CBP has not addressed the issue of reimbursement of Section 301 duties. This is unlike the regulations governing AD/CVD proceedings where importers are not permitted to receive reimbursement from foreign suppliers for AD/CVD duties, and must make a certification to CBP that no reimbursement has occurred or will occur.
5. How long are the Section 301 duties projected to remain in effect?
There is no statutory or regulatory limitation on the duration of these Section 301 duties, and USTR has not announced any termination or expiration date of the duties.
6. How will Section 301 duties be treated in antidumping (AD) proceedings?
Some of the products on the lists issued by USTR are also subject to AD orders. Section 301 duties must be paid in addition to whatever AD cash deposits are required at time of entry.
In calculating dumping margins, the US Department of Commerce (DOC) is required by statute to reduce US price by the amount of "United States import duties." To date, the DOC has not announced how it will be treating Section 301 duties in the context of its AD proceedings. In 2002, President Bush applied tariffs to steel imports under a different statute, Section 201 of the Trade Act of 1974. In subsequent AD proceedings involving products subject to those tariffs, the DOC concluded that Section 201 duties were not "United States import duties," and did not deduct them from US price in calculating a dumping margin. In reaching that conclusion, the DOC noted that to some extent, Section 201 duties and AD duties had the same purpose and function. It is unclear whether the DOC would reach the same conclusion with respect to Section 301 duties.
7. I am an importer; how will the Section 301 duties affect my continuous entry bond?
In order to make entry into the United States, importers are required to maintain either a single entry or continuous entry bond that covers potential duty liability. The bonding requirement is normal practice for importers and is not a special requirement arising from this Section 301 proceeding.
CBP has established formulas to determine the sufficiency of continuous entry bonds, which are based on an importer’s historical duty liability. Importers entering goods subject to Section 301 duties are likely to be incurring increased duty liability relative to these historical levels. If so, CBP may determine that an importer's continuous entry bond is "exhausted," and could prevent an importer from entering additional merchandise until a new bond is obtained with a higher limit of liability. As the process for obtaining a new continuous entry bond can take some time, importers are encouraged to monitor the sufficiency of their bond levels proactively.
8. Is there a process to apply for exclusions from Section 301 duties, and if so, how does it work?
Yes. The deadline for submitting requests for exclusion from Lists 1,2, and 3 have passed, but the deadline for List 4A has not. While USTR continues to process requests for Lists 1, 2, and 3, it has already excluded multiple HTS codes from each list; the status of submitted requests can be found on the USTR's webpage for the Section 301 China proceedings.
Regarding List 1:
The deadline for submitting requests for exclusion from List 1 was October 9, 2018. If granted, the exclusion from List 1 duties will be retroactive to July 6, 2018 (i.e., the effective date of Section 301 duties on List 1 products), and will extend for one year after the publication of the exclusion determination in the Federal Register.
Regarding List 2:
The deadline for submitting requests for exclusion from List 2 was December 18, 2018. If granted, the exclusion from List 2 duties will be retroactive to August 23, 2018 (i.e., the effective date of Section 301 duties on List 2 products), and will extend for one year after the publication of the exclusion determination in the Federal Register.
Regarding List 3:
The deadline for submitting requests for exclusion from List 3 was September 30, 2019. If granted, the exclusion from List 3 duties will be retroactive to September 24, 2018 (i.e., the effective date of Section 301 duties on List 3 products), and will extend until August 7, 2020.
Regarding List 4
The deadline for submitting requests for exclusion from List 4A was January 31, 2020.
Procedure for Filing Exclusion Requests
Interested persons must file their requests for exclusion in accordance with the procedures outlined on the USTR's website. Those procedures vary slightly depending on the list of concern. For requests pertaining to Lists 1 and 2, USTR has also indicated that it would prefer the use of its form. Lists 3 and 4 requests are made through the USTR Exclusion Portal, for which submitters must create an account.
In addition to certain statistical data, exclusion requests must clearly describe the product for which an exclusion is being sought in terms of the product’s physical characteristics; descriptions based on the identity of the producer/exporter or the intended end use of the product are not permitted. Requesting parties must also explain (i) whether the product is available from sources other than China, (ii) whether the imposition of Section 301 duties "would cause severe economic harm to the requestor or other US interests," and (iii) whether the product is "strategically important or related to 'Made in China 2025' or other Chinese industrial programs." In addition to the availability, economic harm, and Made in China 2025 questions, parties requesting exclusions for Lists 3 and 4A products must comment on whether they have "attempted to source the product from the United States or other third countries," and may "provide information about the possible cumulative effects of the Section 301 tariff actions" by mentioning, if applicable, the dutiable value of their imports included in Lists 1 or 2, and any previous exclusion requests they have submitted for products on those lists. Once exclusion requests are posted, other parties may respond to these requests, and submitters are given time to reply to those responses.
9. Can exporters obtain duty drawback for Section 301 duties?
CBP has advised that Section 301 tariffs are eligible for duty drawback. We expect that CBP will be rigorous in enforcing the requirements for supporting documents on claims for duty drawback on goods for which Section 301 tariffs were paid.
There are specific rules that apply to the movement of merchandise among NAFTA countries which may interfere with the practical use of drawback when the shipment is imported into the United States, and then sent to Mexico or Canada.
10. Are Section 301 duties applicable to goods admitted into a foreign trade zone (FTZ)?
When merchandise subject to Section 301 duties is admitted into an FTZ, no Section 301 duties will be owed. However, in general, if this merchandise is subsequently entered into the United States, it will be subject to Section 301 duties even if the Section 301 duties have been lifted at the time of entry. If goods are admitted into an FTZ and then shipped outside the United States, no Section 301 duties would be owed. However, if goods are admitted into an FTZ and then later shipped to Mexico or Canada, special NAFTA rules still may cause the Section 301 duties to apply.
11. Can goods subject to Section 301 duties be entered under temporary importation in bond (TIB)?
CBP has stated that merchandise subject to Section 301 duties can be entered under TIB, but that the relevant bond must cover Section 301 duties in addition to any other duties or charges that might be owed.
12. What are some strategies to mitigate the impact of the Section 301 duties?
For US parties that purchase goods subject to the Section 301 proceeding, there is no easy way to avoid these duties. The following are some strategies that companies have been considering:
- Source merchandise from entirely non-China suppliers. Many companies have started to consider diversifying their supply chains by exploring non-China suppliers of products they had historically purchased from Chinese companies.
- Apply for exclusion. To date, the USTR has approved hundreds of exclusion requests. Granted exclusions cover any Section 301 tariffs paid since the relevant effective date, and provide at least one year of exclusion (or shorter, in the case of List 3). In light of the successes registered by numerous affected companies, the process should be carefully considered.
- Reconfirm tariff classifications. Over the last several years, as normal duty rates have dropped to zero for many products and, as a result, the correct duty classification of imports has had less practical consequence, importers may have been using the wrong HTS number on their entries. Since Section 301 tariffs and exclusions are applied on the basis of HTS numbers, US parties should reconfirm that the tariff classification being used is correct. This can be done through internal analysis, but in difficult cases, parties may seek to obtain a ruling from CBP.
- Reconsider entry valuation. Importers should reconfirm the value of their entries, to see if there is any legal means of reporting a lower value. While this will not eliminate duty liability, since duty rates are assessed against entered value, this could result in a lower overall duty payment.
- Perform final manufacturing activities outside of China. Many companies are now looking at the possibility of moving final manufacturing activities outside of China, in order to give the finished products a non-China country of origin. In order for this strategy to be successful, CBP must find that this final stage of manufacturing constitutes a "substantial transformation." The determination of whether a production process constitutes a substantial transformation is highly fact-specific and subjective, and must be made carefully in order for an importer to satisfy its obligation of reasonable care. Here too, obtaining a ruling from CBP may be appropriate. The Trump Administration has demonstrated a willingness to apply pressure to countries like Vietnam, through which certain companies have attempted to redirect Chinese-made goods in a practice called "transshipment," to avoid paying US tariffs.
- Consider Chapter 98 options. CBP has explained that Section 301 duties shall not apply to products for which entry is properly claimed under most headings or subheadings in Chapter 98. Chapter 98 of the HTS covers a diverse range of categories that apply in addition to the normal HTS number. But these Chapter 98 provisions apply only in certain limited situations, and where facts about the shipment and its history can be supported with detailed documentation and other requirements in the CBP regulations. Chapter 98 provisions include:
- American goods returned
- Articles exported and returned (Section 301 duties may still apply to the value of processing in China)
- Personal exemptions
- Importations of the US government
- Importations of foreign governments and international organizations
- Importations of religious, educational, scientific, and other organizations
- Samples imported for soliciting orders
- Items admitted temporarily under bond
- Certain products of American fisheries
- Certain products for agricultural uses
- Other provisions
