In this alert, we review recent key developments in the wake of the setback in US-China trade negotiations, including:
- The United States Trade Representative's (USTR) announcement to increase tariffs on US $200 billion worth of Chinese imports from 10% to 25%
- The USTR's announcement to establish a "List 4" covering essentially the remaining US $300 billion worth of Chinese imports
- The Chinese government's retaliatory response of levying steeper tariffs on a previously targeted $60 billion worth of US imports
- The Chinese government's announcement of a product exclusion process for merchandise subject to China's retaliatory tariff lists
Lastly, we provide thoughts on how affected companies can manage their exposure to new and impending trade measures.
Increased Tariffs on List 3 Products
On Thursday, May 9, 2019, the USTR that products of China that were previously subject to a 10% duty under Section 301 (i.e., "List 3"), valued at $200 billion, would be subject to an increased duty of 25% effective May 10, 2019.
According to a subsequent Federal Register notice and clarification by Customs and Border Protection (CBP), merchandise imported under List 3 exported before May 10, 2019 and entered into the United States before June 1, 2019 will continue to be subject to a 10% duty. Thus, this provides a short grace period for certain merchandise already in transit to the United States.
The USTR also indicated that it would publish separately the relevant procedures for submitting product exclusion requests for merchandise covered under List 3. As of the time of publication of this alert, such procedures have not been announced.
Introduction of List 4: Additional Duties under Section 301 on Remaining Chinese Imports
On Monday, May 13, 2019, the USTR issued a notice requesting comments on a proposal to apply a 25% duty to an additional $300 billion worth of merchandise from China (i.e., "List 4"). If adopted, this proposal would result in essentially all remaining Chinese imports being subject to the same level of duties imposed on merchandise on Lists 1 through 3. According to the announcement, the proposed product list excludes pharmaceuticals, certain pharmaceutical inputs, select medical goods, rare earth materials, and critical minerals.
As with Lists 1 through 3, the USTR has established a process for the public to submit comments regarding the inclusion or removal of particular merchandise on List 4. The key dates for the notice and comment period are as follows:
- June 10, 2019: Due date for filing requests to appear and a summary of expected testimony at the public hearing
- June 17, 2019: Due date for submission of written comments
- June 17, 2019: Public hearing before the Section 301 Committee
- Seven days after the last day of the public hearing: Due date for submission of post-hearing rebuttal comments
The notice requests commenters to "address specifically whether imposing increased duties on a particular product would be practicable or effective to obtain the elimination of China's acts, policies, and practices, and whether imposing additional duties would cause disproportionate economic harm to US interests, including small or medium-size businesses and consumers." Parties are not required to participate in the public hearing in order to submit comments.
China's Retaliatory Actions
In response to US actions increasing tariffs on List 3 merchandise from 10% to 25%, the Chinese government took steps to increase duties on certain US imports. On Monday, May 13, 2019, the Chinese Ministry of Finance announced that it would increase tariff rates on four of its retaliatory lists, targeting $60 billion of US imports to China, to the originally proposed rates of 25%, 20%, 10%, and 5%, respectively.
As background, when the United States introduced a 25% tariff on $50 billion worth of Chinese goods in June 2018 – split between Lists 1 and 2 – the Chinese government responded in kind by imposing a 25% tariff on $50 billion worth of US imports. These retaliatory tariffs took effect on July 6, 2018 and August 23, 2018, the dates on which the United States' List 1 and List 2 duties went into effect, respectively.
Following the United States' July 2018 proposal to impose a 25% tariff on $200 billion worth of Chinese goods – List 3 – the Chinese government issued a notice on August 3, 2018 targeting approximately $60 billion worth of US imports. These imports were distributed across four retaliatory lists, with rates of 25%, 20%, 10%, and 5%, respectively. Implementation for these retaliatory duties was set to track the implementation of duties for List 3 merchandise in the United States.
After the United States determined to apply (until January 1, 2019) a 10% duty to List 3 merchandise in September 2018, the Chinese government responded by lowering tariff rates applied to merchandise on its four retaliatory lists to 10%, 10%, 5%, and 5%, respectively. On December 14, 2018, China continued to de-escalate retaliatory tariff actions by suspending such duties on certain autos and auto parts in Chapter 87, all of which had been subject to 5% retaliatory duties.
We summarize the history of Chinese retaliatory tariffs with the following chart, which shows the Chinese tariff list, corresponding US tariff list, number of HTS lines covered, and announcement/effective dates and tariff rates:
The Chinese State Council Tariff Commission has also announced a product exclusion process for merchandise subject to China's retaliatory tariff lists. Applications will be accepted in two batches, one for Chinese Tariff lists 1 and 2 and the other for Chinese Tariff lists 3, 4, 5, and 6. The application window for batch one will be from June 3, 2019 through July 5, 2019. The application window for batch two will be from September 2, 2019 through October 8, 2019.
Product exclusion applications will be evaluated based on: 1) difficulty of obtaining alternative goods, 2) economic damage to the applicant, and 3) major structural impacts on any relevant industries from the tariff increase. Any product exclusions granted will remain in place for one year.
Initial Next Steps for Affected Companies
Companies whose products appear on the recently announced List 4 should consider submitting public comments to USTR or participating in the upcoming hearing. Companies should also consider taking steps to ensure that officials at USTR and the White House are aware of their concerns. They may also want to urge their congressional representatives to weigh in with the Administration on their behalf.
Companies whose products are subject to increased tariffs under the USTR's List 3 should consider filing product exclusion requests. USTR has not yet released deadlines and procedures for this process, but we expect a Federal Register publication in the coming weeks. It is likely that the exclusion process for List 3 will track the exclusion processes previously established for Lists 1 and 2. If so, companies should expect to provide detailed descriptions of the physical characteristics of their products, as well as address whether the particular product is only available from China, whether the imposition of additional duties would cause severe economic harm, and whether the particular product is strategically important or related to "Made in China 2025" or other Chinese industrial programs.
Concerned companies should also assess their exposure to additional friction in the US-China relationship and follow US-China trade developments carefully. As is evident from the most recent tariff increases and retaliation announcements, the state of play between China and the US is highly fluid and is expected to remain so even in the event an agreement is reached. In this environment, companies may well wish to reevaluate supply chains should they run through China, and consider other adjustments to their commercial activities.