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CHINA STRIKES BACK ON U.S. TARIFFS

By Mark Ludwikowski
Clark Hill, PLC

WHERE IS TRADE HEADED?

China did not take long to announce its own unilateral retaliatory action in response to tariffs the U.S. plans to impose on over 1,300 products worth about $50 billion as a result of its Section 301 investigation into China’s intellectual property practices. On April 4, 2018, a day after the U.S. pronounced the Section 301 decision, Beijing vowed to levy 25% tariffs on U.S. products ranging from soybeans to airplanes to cars and chemicals should the United States follow through with its implementation of the Section 301 tariffs.

Section 301 Tariffs

China’s threat came shortly after the Office of the U.S. Trade Representative (USTR) proposed on April 3 to impose 25% tariffs on a multitude of imported goods from China under the Section 301 investigation. The covered products span over 1,300 separate tariff classification lines including chemicals, mechanical and electrical machinery, rubber, pharmaceuticals, as well as steel and aluminum products among others. This is in addition to any import duties and fees already in place. This means that an imported product on the Section 301 list that was also covered by the Section 232 steel and aluminum tariffs announced in March could be subject to 50% or 35% duties, respectively.

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. 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. A complete list of the products identified by their eight digit tariff classification can be found here

The Section 301 tariffs have not yet been imposed, but may be implemented at the conclusion of the proceeding which could be as early as July 2018, but more probably would be in September or later.  In the meantime, interested parties will have an opportunity to provide written comments by May 11 which can address the removal or inclusion of products from the list, or the amount of the tariff rate.  There will also be a public hearing on May 15 in Washington, DC and parties will be able to submit post-hearing rebuttal comments due on May 22.

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. If the Section 301 tariffs are ultimately imposed, U.S. Customs and Border Protection will certainly 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 notice 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 exits.

China’s Threatened Retaliation

Shortly after China’s announced retaliatory tariffs, 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.

The Chinese plan does exactly that. It targets the biggest American exports to China including soybeans and airplanes, while many other goods on its list such as sorghum or beef intentionally impact the U.S. farm states which supported President Trump.

China has also challenged the U.S. Section 301 tariffs at the World Trade Organization (WTO) through a consultation request which alleges that U.S. actions violate the WTO’s most-favored nation principle, run counter to WTO dispute settlement proceedings and exceed U.S. bound tariff rates. If the WTO agrees with China, it could authorize its retaliation against U.S. exports.

The tit for tat may yet continue. A couple of days after China’s retaliatory pronouncement the White House asked the USTR to consider adding another $100 billion in Chinese goods to the $50 billion already targeted through the Section 301 action.  “Rather than remedy its misconduct, China has chosen to harm our farmers and manufacturers,” the Administration’s press release noted.

The Big Picture

Over the summer months the trade community may hold its collective breath while the Section 301 process works itself out. By September, the Administration is expected to make a decision whether Section 301 tariffs will be applied. In the meantime, negotiations with China over trade, intellectual property and possibly geopolitical issues such as North Korea, may factor into the decision making.

Treasury Secretary Steve Mnuchin is expected to lead a delegation to China shortly to discuss the Section 301 tariffs and other trade issues.  There is speculation that China may propose a pledge to purchase $100 billion in U.S. products so that the Section 301 tariffs are dropped. However, such a proposal is likely to face opposition from U.S. businesses that want to sell in China and see the Section 301 as mechanism to make the Chinese market more accessible.  If negotiations do not resolve the issue, 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.

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 popular and surgical antidumping (AD) and countervailing duty (CVD) petitions against imports? 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 over 25 years against Chinese aluminum sheet? Or will they count on the President to continue to use broader tariffs, such as those under Section 201, 232 or 301 as a tool in his trade and investment agenda?

AD and CVD cases can run up high legal bills and domestic producers may indeed be inclined to hold off filing these actions in the hopes the Trump Administration can provide the needed relief through tariffs.  Over the years U.S. industry has also complained that filing of AD and CVD cases can sometimes feel like a game of whack a mole as the targeted products relocate manufacturing to third countries or are simply transshipped. From that standpoint, global tariffs under the Section 201 or 232 investigations would seem to offer broader relief to affected industries.  In fact, in his testimony before Congress in March, Commerce Secretary Wilbur Ross addresses precisely this point: “if we’ve designed the 232s right, there should be somewhat fewer {AD/CVD} cases in the future because it covers such a wide range of products. Between the two cases {steel and aluminum}, I think it’s some 700 odd products that are – that are covered. So our hope is that this kind of omnibus thing will reduce, somewhat, the flow of cases.”

So how does the Trump Administration’s use of trade remedies thus far compare to its predecessors? In his Congressional testimony, Secretary Ross noted that the Commerce Department had “been much more active than any prior administration. We have been running 70-80 percent more cases initiated than had been true in the prior administration.” While that number of cases may be higher than a comparable period during the Obama administration, it has not been without hurdles. Some of those cases have been terminated by the bi-partisan International Trade Commission which has the power to block Commerce’s AD/CVD determinations. In fact, the Commission has terminated several cases during the Trump presidency so far, including on imports of aircraft from Canada, titanium sponge from Japan and Kazakhstan, gluconate and gluconic acid from France and rubber bands from Sri Lanka. Still these are only a handful of negative AD/CVD findings by the Commission. Overall, the agency has been overwhelmingly supportive of the domestic industry in recent months, disregarding even the fact that some products like aluminum foil may already be covered by Section 232 tariffs.

In this climate importers may find themselves nostalgically recalling the relatively serene prior decade when AD/CVD duties were the trade remedy of choice. 

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

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