In this alert, we bring you up to date on developments regarding the US Section 301 trade action, the Chinese response, and the state of play between the US and China. We also provide our thoughts on how affected companies can manage their exposure to new and impending trade measures.
On June 15, 2018, the Office of the US Trade Representative (USTR) issued an update regarding its Section 301 investigation into Chinese technology and intellectual property practices. This update contains two lists of products, identified by Harmonized Tariff Schedule (HTSUS) code, that will be and could be subject to additional duties.
The first list of products is the final version of a list initially released by USTR on April 3, 2018, upon which the United States will be imposing 25% tariffs effective July 6, 2018. Minutes after this final list was published, China announced that it would impose 25% tariffs on a comparable amount of US exports and that all of the results of recent trade negotiations would be invalidated.
The second list was a proposed list of additional products upon which USTR has proposed imposing an additional 25% duty. This list is not yet finalized and "will undergo further review in a public…comment process, including a public hearing," after which USTR will issue a final determination on additional products to target with tariffs.
The announcement that the United States would impose Section 301 tariffs marked a reversal of course in US-China trade relations. As the deadline for public comments on USTR’s April tariff list neared, US Treasury Secretary Steven Mnuchin stated that the United States would postpone tariffs while finalizing a bilateral agreement to reduce the US-China trade deficit by increasing US energy and agriculture exports to China and to promote bilateral commerce and intellectual property protection. However, one week later, the White House stated that Section 301 tariffs would be announced by June 15 and would go into effect soon after. Since this announcement, US-China trade talks have deteriorated, China has retaliated for the Section 301 tariff plan, and both countries have made significant additional retaliation threats against one another.
USTR’s Finalized First Tariff Retaliation List
The first USTR Section 301 tariff list covers 818 of the 1,333 HTSUS product categories that appeared in the preliminary April list. That list was shortened after a public comment process and multi-day hearing during which hundreds of companies and organizations advocated for the removal or addition of various products. Whereas the preliminary list covered $50 billion worth of US imports from China, the refined list covers $34 billion worth of Chinese products, according to USTR.
On June 15, USTR announced that 25% duties on these 818 product categories would become effective as to entries made on or after July 6, 2018. These duties will apply in addition to any normal duties, antidumping and countervailing (AD/CVD) duties or other import charges on these Chinese products. This finalized list covers medical and scientific equipment, semiconductors, vehicles and aircraft, machinery (including engines, motors, batteries, and turbines), electrical and audiovisual equipment, and agricultural and industrial machinery. The product categories removed from the list cover steel and aluminum, pharmaceuticals, medical instruments, and machinery and inputs used in consumer products manufacturing.
According to a USTR notice, “USTR will establish a process by which US stakeholders may request that particular products classified within an HTSUS subheading” included on the first list “be excluded from these additional duties.” Interested parties will also be given the opportunity to oppose filed exclusion requests. Details for this process will be announced "within the next few weeks,” according to USTR.
USTR’s Second Proposed Tariff Retaliation List
USTR also published a second list proposing that 284 additional product categories be targeted with 25% tariffs. The list covers approximately $16 billion worth of Chinese products including chemicals, polymers and plastics, vehicles and transportation equipment, motorcycles, semiconductors, and semiconductor manufacturing equipment. The list includes a few products from China (such as solar cells and panels and polytetrafluoroethylene (PTFE)) currently subject to other import restrictions imposed by the Trump Administration.
USTR is soliciting public comments and will also hold a hearing for interested parties to express views on this second list. The timeline is as follows:
USTR requests that these comments be limited in subject matter to the maintenance or elimination of product categories currently appearing on this second list. As it did when soliciting comments on the preliminary version of its first list, USTR asks that parties address whether new tariffs on particular items listed “would be practicable or effective to obtain the elimination” of the Chinese policies and practices examined in the Section 301 investigation. USTR also requests that comments address whether targeting certain products “would cause disproportionate economic harm to US interests, including small- or medium-size businesses and consumers.”
In developing the preliminary version of its first list, USTR considered products with lower associated consumer impacts to be those that could feasibly be sourced from elsewhere if tariffs – and thus prices – increased on these Chinese products. This may also be relevant to companies trying to mitigate the impact of tariffs on their business. In addition to participating in the USTR proceedings, concerned companies would be wise to assess the extent to which items on this second list could be sourced domestically or from other non-China sources.
China’s Retaliation Lists
Within hours of the USTR announcement, China published two lists of US exports on which to impose 25% tariffs. China intends to match the US plan by imposing tariffs on one group of products on July 6, 2018 and on another group at a later date.
China’s first list contains 545 product categories that include most of the items – such as soybeans, tobacco products, whiskey, beef, and vehicles – that appeared in a preliminary list released in response to USTR’s April list. However, China has since removed airplanes and added a variety of US seafood, dairy, and other agricultural exports. China announced that its first round of tariffs will affect $34 billion worth of US exports. China also released a second group of additional US exports to target with 25% tariffs, which would go into effect when tariffs on the second USTR list take effect. The second Chinese list includes chemicals and polymers, fuels, and medical technologies.
Section 301 Tariffs and the Broader US-China Trade Relationship
These tariffs are one part of broader Section 301 action taken by the Trump Administration as a result of findings that Chinese technology transfer and intellectual property practices are “unreasonable or discriminatory,” and “[burden] or [restrict] US commerce.” (For additional background on the Section 301 investigation and relevant Chinese practices, please see one of our earlier Section 301 alerts).
In addition to imposing tariffs, the US filed a World Trade Organization (WTO) complaint against China challenging its allegedly discriminatory regulations pertaining to the licensing of technology from non-Chinese to Chinese firms.
Based on a White House announcement in late May, the US Treasury Department was also preparing new restrictions on Chinese investment into the US and US exports to China as they may relate to “the acquisition of industrially significant technology.” This plan was to be announced by June 30, 2018 and implemented soon after.
However, on June 27, President Trump released a statement that pending legislation in Congress to reform the Committee on Foreign Investment in the United States (CFIUS) “will provide additional tools to combat the predatory investment practices that threaten [US] critical technology leadership, national security, and future economic prosperity.” The President announced that he will direct his Administration, upon the enactment of this legislation, “to implement it promptly and enforce it rigorously, with a view toward addressing the concerns regarding state-directed investment in critical technologies identified in the Section 301 investigation.” If this legislation does not pass, the President will direct his Administration to “deploy new tools” to address foreign investment concerns on a globally-applicable basis. For more information about the presidential announcement and CFIUS reform legislation, please look to the forthcoming international law advisory from Steptoe’s CFIUS practice.
The President also directed the Secretary of Commerce to lead a review of the existing US export control regime as it pertains to “the transfer and export of critical technologies.” According to the announcement, the review could result in changes to US export controls with a view toward defending US “national security and technological leadership.”
China has retaliated for each recent US trade action by imposing or announcing plans to impose equivalent barriers to US exports. (For discussion of Chinese retaliation for various US actions, please see our earlier US-China trade alert). China has also retaliated with new AD/CVD investigations and duties against US agricultural and chemical exports and with heightened customs inspections of US goods.
The US considers tariffs to be a justified response to the policies identified in the Section 301 proceeding, and therefore is treating China’s response to these tariffs as evidence that it “has no intention of changing [these] unfair practices.” In response to China’s plans to retaliate, President Trump directed US Trade Representative Robert Lighthizer to “identify $200 billion-worth of Chinese goods for additional tariffs at a rate of 10%.” The President indicated in his announcement that after a legal process (which will likely include a public comment period and hearing) is completed, these tariffs would take effect if “China refuses to change its practices” and moves forward with retaliation.
President Trump also stated that he would pursue tariffs on yet another $200 billion worth of US imports from China if China responds to this latest threat with additional retaliation. If all of these threatened measures are ultimately imposed, nearly 90% of US imports from China (based on the 2017 level of $505.6 billion) would be subject to some form of additional Section 301-related tariff.
China quickly threatened “to take comprehensive quantitative and qualitative measures and retaliate forcefully” if the US moves forward with broader tariffs. It is worth noting that the United States exports considerably less than $450 billion worth of goods to China and therefore China could not respond in kind to these potential tariffs. The fact that China could not respond with identical measures suggests that it might take a number of actions against US economic interests, such as discouraging Chinese companies from purchasing American goods, establishing new regulatory barriers to US exports, imposing additional restrictions on US investment or taking regulatory action against US companies operating in China.
Next Steps for Affected Companies
Companies concerned about the second Section 301 tariff list should consider submitting public comments to USTR or participating in the upcoming hearing. Companies should also consider taking steps to ensure that officials within USTR and the White House are aware of their concerns. Companies may also want to urge their congressional representatives to weigh in with the Administration on their behalf. We are aware of several instances in which the submission of comments, coupled with an effective legislative strategy, was effective in getting a product removed from the initial Section 301 list published in April. In evaluating the appropriate level and type of effort to expend in this process, it is important to keep in mind that USTR is intensely seeking products on which to impose Section 301 tariffs to meet its initial goal of covering $50 billion in US imports from China with this particular tariff action.
Companies whose products are on USTR’s finalized first list should consider filing product exclusion requests. USTR has not yet released the timing and procedures for this process, but we expect that USTR will conduct a review of requests similar to its review of comments on the Section 301 tariff lists themselves. If so, USTR may ask US companies to explain how the inclusion or exclusion of the products in question would impact US consumers, US economic interests, and USTR’s objective to use Section 301 action to secure changes to Chinese technology and intellectual property policies. USTR may also be receptive to evidence that the product in question is not sufficiently produced by domestic (and/or non-Chinese) companies to meet US demand, or that the requesting company imports a unique version of the product from China.
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 threats and retaliation announcements, the state of play between China and the US may drastically and quickly change in the coming months, and companies with exposure will need to be able to respond quickly to these developments.
We will continue to keep you informed of Section 301 developments and important developments in the US-China trade relationship. If you have any questions, please contact Susan Esserman at +1 202 429 6753 or Eric Emerson at +1 202 429 8076 in our Washington office.
Trade Policy Analyst