As Appeared in Law360, "Reading The China Tariff Tea Leaves" by Mark Ludwikowski

Jul 13, 2018

As appeared in Law360, "Reading The China Tariff Tea Leaves", by Clark Hill attorney Mark Ludwikowski.

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In April, the Trump administration proposed a 25% tariff on hundreds of imported Chinese products worth approximately $50 billion, in a measure aimed at addressing China’s perceived unfair trade practices. On June 15, 2018 the U.S. made this tariff a reality immediately sparking retaliation from Beijing.

Three days later, President Trump escalated the rhetoric indicating that the administration was prepared to impose tariffs on another $200 billion worth of Chinese imports if China chose to retaliate rather than address its practices. All in all, the tariff could eventually cover most of China’s exports to the United States which in 2017 were valued at $505 billion. By comparison, U.S. exports to China totaled $130 billion, which could force Beijing to consider other retaliatory options if the escalation continues.

Section 301 Tariff

In April 2018, the administration originally had issued a proposed list of 1,333 products which could be subject to this tariff pursuant to its Section 301 investigation. The Section 301 action is directed solely against China and comes in response to the findings by the USTR on Chinese unfair trade practices related to its intellectual property policies. U.S. businesses that want to sell in China ee the Section 301 as mechanism to make the Chinese market more accessible.

The list of products was prepared by several U.S. government agencies and identifies goods that allegedly benefit from Chinese industrial policies while sparing products that would cause disruption to the U.S. economy and consumers

After reviewing objections and recommendations from interested parties, the Office of the U.S. Trade Representative (“USTR”), removed 515 items from its original list, but added 284 new ones.

The final group of products to which the 25% tariff will apply includes 1,102 separate U.S. tariff lines identified by their eight digit subheadings.  The USTR has broken down the 1,102 tariff lines into two lists. Both lists include products from industrial sectors such as aerospace, information and communications technology, robotics, industrial machinery, new material and automobiles.

The first list contains 818 tariff lines of the original 1,333 lines from the list issued in April. According to the USTR, these lines cover approximately $34 billion worth of imports. These 818 products will now be subject to the 25% tariff which U.S. Customs and Border Protection (“CBP”) will begin collecting on July 6, 2018. 

The second list contains a newly proposed 284 tariff subheadings totaling approximately $16 billion in imports. These will undergo further review similar to the public notice, comments and hearing which applied to the originally proposed list.  Once the review process is complete, the USTR will issue a final determination as to which, if any, of these products will also be subject to the 25% tariff. 

The list of the 818 separate U.S. tariff subheadings subject to the additional 25% duties on July 6, 2018 is available at:

https://ustr.gov/sites/default/files/enforcement/301Investigations/List%201.pdf

The list of the newly proposed 284 U.S. tariff subheadings is available at:

https://ustr.gov/sites/default/files/enforcement/301Investigations/List%202.pdf

On June 20, 2018, the USTR issued a Federal Register notice detailing the opportunity for interested parties to participate in the proceeding concerning the newly proposed list of products. According to the notice, the following deadlines will apply to this process:

June 29, 2018: Due date for filing requests to appear and a summary of expected testimony at the public hearing, and for filing pre-hearing submissions.

July 23, 2018: Due date for submission of written comments.

July 24, 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 a.m.

July 31, 2018: Due date for submission of post-hearing rebuttal comments.

U.S. importers may be considering ways to avoid the 301 tariffs by having products with Chinese components assembled in third countries or in a foreign trade zone (“FTZ”).  With the former, the determination will hinge on whether the operations performed in third countries are sufficient to have “substantially transformed” the Chinese components into a new and different article of commerce which has a different name, character or use than the components imported into the third country. Now that the Section 301 tariffs will be imposed starting July 6, CBP will be paying attention to potential evasion and to make sure third country operations are sufficient to confer origin upon the goods. Hence due diligence by importers regarding the country of origin of products sourced this way will be critical. 

With regard to FTZ usage, the USTR’s Section 301 Federal Register notice issued on April 6, 2018 instructs that “{t}o ensure the effectiveness of the action, any merchandise subject to the increased tariffs admitted into a U.S. foreign trade zone on or after the effective date of the increased tariffs would have to be admitted as ‘privileged foreign status’ as defined in 19 CFR 146.41, and would be subject upon entry for consumption to the additional duty.” Accordingly, whether tariffs will apply will depend on when the article enters the FTZ, how it is transformed and what happens to it once it exists.

Escalating Countermeasures

China threated retaliatory action in response to the Section 301 tariffs within days of the U.S. announcement last April. At that time, Commerce Secretary Wilbur Ross noted in a CNBC interview that the U.S. stock market should not have been surprised by the U.S. actions or the Chinese response. “This has been telegraphed for days and weeks,” he said.  Indeed, traditionally any action taken to raise tariff levels on imports from a trading partner creates the distinct risk of retaliation by that trading partner, most likely in the form of tariff increases, and often targeted strategically to cause maximum effect on key U.S. exports, in order to create pressure to reverse the U.S. action.

Thus, once the U.S. officially announced the tariff on June 15, China’s Commerce Ministry responded immediately with a proportional countermeasure placing tariffs on $50 billion worth of U.S. goods aimed at politically sensitive industries.  The Chinese tariff targets key American exports to China including agricultural products and automobiles which impact the U.S. states which supported President Trump.

The escalation did not stop there, as President Trump upped the ante on June 18 by requesting that the USTR identify and additional $200 billion worth of Chinese goods for 10 percent tariffs. The President explained in a statement that China’s retaliation shows that it “apparently has no intention of changing its unfair practices related to the acquisition of American intellectual property and technology. Rather than altering those practices, it is now threatening United States companies, workers, and farmers who have done nothing wrong.”

If negotiations are not successful, it may come down to which side faces greater pressure to impose tariffs and countermeasures.  While China is the more export-dependent country, it is unlikely to face the same sort of industry protests or lobbying aimed at the Trump Administration in opposition of the tariffs.

It is interesting to consider what implications these actions may have on the overall U.S. trade policy and positions by various industries. Will domestic producers be less inclined to file the traditionally more common and surgical antidumping and countervailing duty petitions against imports from specific countries? Will they instead rely on the Department of Commerce to self-initiate such petitions on behalf of U.S. industry as it did last November for the first time in decades against Chinese aluminum sheet? Or will they count on the President to continue to use broader measures, such as those under Section 201, 232 or 301 as a tool in his trade and investment agenda?

Mark Ludwikowski is a partner in the International Trade Practice Group of Clark Hill, PLC and is resident in the firm’s Washington D.C. office. He can be reached at 202-640-6680 and mludwikowski@ClarkHill.com