Section 301 Tariffs on China: Analysis and Guidance
prepared
March 23, 2021
by
David Trumbull, Agathon Associates
Glenn Page, Foreign Trade Zone Solutions LLC
The U.S. Section 301 tariffs on China have been a burden on many U.S. business since implemented by the Trump administration in 2018. As a new administration settles in Washington, the tariffs do not appear to be going away anytime soon. The good news is there are tariff mitigation strategies that can be employed to avoid or reduce the tariffs altogether.
China's history on employing unfair trade practices is well-established. Early in the Trump administration, the Office of the U.S. Trade Representative,(USTR) conducted an investigation concerning these unfair trade allegations by China under Section 301 of the Trade Act of 1974. As a result of that investigation, it was discovered that China routinely engages in unfair trade acts and policies, utilizes cyber practices to steal U.S. intellectual property, and imposes grossly unfair innovation and technology transfer mandates upon U.S businesses operating in China. To address those findings, the United States imposed tariffs on products from China. Many classes of merchandise were made subject to 25% Section 301 tariff. As of now, it appears the President Biden has no near-term plans to eliminate or modify the tariffs.
If your company imports from China and is incurring the 25% tariff, on top of the general rate of duty, you know, first-hand, that this tariff action, however well-intended and needed, is imposing considerable collateral damage on U.S. businesses. You probably have questions such as--
Will President Biden eliminate or modify the tariffs?
It appears that the Biden Administration agrees that the investigation under the previous Administration has established China's bad behavior and has justified the Section 301 tariff action. In the President's Trade Policy Agenda, released March 1, 2021, the Office of the U.S. Trade Representative stated: "The Biden Administration is committed to using all available tools to take on the range of China’s unfair trade practices that continue to harm U.S. workers and businesses." Following her February 25, 2021, Senate hearing confirmation hearing Biden nominee for United States Trade Representative, Katherine Tai, stated the Biden Administration's commitment to "work with Congress to ensure that those tariffs are appropriately responsive to China's practices and consider the impact on U.S. businesses, workers and consumers."[1] Clearly, these are not the words on an Administration that plans to repudiate the China tariffs. However, it also appears to leave open the question of possible re-opening of the exclusion process, which allows for businesses to request from the USTR a waiver or removal of certain articles of merchandise that have been identified and targeted by the USTR for higher tariffs. This can be accomplished by application to the USTR with a persuasive line of reasoning why certain items should be excluded from the Section 301.
So far, the Biden Administration sole action relating to the China tariff was a notice on March 5, 2021[2], of the U.S. Trade Representative's determination to extend certain product exclusions on medical-care and/or COVID response products through September 30, 2021. Even in this action the Biden Administration was continuing the policy of the Trump Administration which on December 23, 2020[3], extended through those exclusions, set to expire December 31, 2020, through March 31, 2021.
Can I get the products I import off the list for tariffs?
At this time, there is no mechanism for removing classes of articles from the tariff action or excluding specific articles. The USTR received a total of 52,746 exclusion requests, of these, 6,804 (13%) were granted and 45,942 (87%) were denied.[4] The exclusion process was criticized by many for lack of transparency. Senator John Cornyn (Rep., Texas) asked USTR nominee Katherine Tai whether she would "consider reinstating the process for product exclusions and those that had previously received such exclusions?" Her reply was--
China's track record of using unfair practices to acquire U.S. technology, to the detriment of U.S. innovators and workers, is well-established. In the last administration, USTR conducted an investigation against unfair trade practices in China under Section 301 of the Trade Act of 1974 and found that China engages in unfair trade acts policies and practices related to intellectual property, innovation and technology transfer. To address those findings, the United States imposed tariffs on products from China. If confirmed, I will work with Congress to ensure that those tariffs are appropriately responsive to China’s practices and consider the impact on U.S. businesses, workers and consumers.
Is there any other way I can get out from under this financial burden?
There are some strategies for mitigating Section 301 China tariffs. Please note that in the examples given below all reference to specific companies and their plans are based solely on public information; no business confidential information has been used in compiling these examples.
1. Verify that the merchandise you import is subject to the tariff.
The Section 301 tariffs are applied based on the eight-digit classification of the merchandise in the Harmonized Tariff Schedule of the United States ("HTSUS"). The first thing we do for a client facing a Section 301 tariff is to determine whether they have been using the correct classification. we have helped clients avoid the tariff by establishing the correct classification. In a case where they have already paid the tariff due to misclassification it is often possible to get refund from Customs.
2. Move a critical part out of China.
Getting out of China completely may not be an option. Investments and partnerships have been made. Re-creating factories and the rest of the supply chain in other country can be expensive and may take months or years. The good news is that it may not be necessary to get completely out of China to get out from under the China tariffs.
Determining the country of origin of merchandise is complex. The U.S. customs regulations make an important distinction between merchandise made in a particular country and merchandise merely assembled in a particular country. When components from two or more countries are assembled in one country, the country of assembly is not necessarily the country of origin. Rather, Customs may look to all the components that make up the finished article and determine what is the single component that defines what the article is. The origin of that one component may be the origin of the finished article, even if the last assembly operation was in China and used Chinese components.
An Example
On September 24, 2020, U.S. Customs and Border Protection determined the country of origin of Yamaha Motor Corporation, USA motorized bicycles assembled in China from components made in China, Japan, and Taiwan. The frame was made in Taiwan. CBP has consistently found that the essence of a bicycle is its frame. Therefore, CBP ruled that the country of origin of the Yamaha motorized bicycles was Taiwan, not subject to the China Section 301 tariff of 25% on motorized bicycles of classification 8711.60.0090, even though the bicycles were assembled in China and had substantial Chinese-origin content.[5]
3. Get out of China
Some manufacturing does not require a large investment in plant and equipment and can be more easily relocated. For example, to produce hats and other head coverings of textile materials all you need is some sewing machines to assemble hats from cut fabric and machines to knit hats.
In 2018, prior to the Section 301 tariffs, China dominated U.S. imports of hats, accounting for 75% of all U.S. imports of hats. There were just six other nations that had at least one percent of the share, and the rest of the world, collectively, accounted for just two percent.
With the 25% Section 301 tariff in place in 2019, China dropped to 67%, Vietnam and Bangladesh each had significant growth, there were nine nations, in addition to China, that each had at least one percent of the trade, and the rest of the world grew to a collective three percent.
The year 2020 brought the pandemic and overall reduced demand for hats. The biggest loser was China, with dropped to 59% of all shipments. Trade further diversified, with 11 individual nations each accounting for at least one percent of trade, and the rest of the world, collectively, accounting for four percent.
Not only did the tariff on China diversify the import supply chain, but it also resulted in some hat production returning the U.S.
4. File for an exclusion
As noted above, there is no exclusion process now. The former process, which is closed, was criticized for lack of transparency. It also resulted in an 87% denial rate. We filed requests relating to nine articles, three of which (33%) were approved. Should an opportunity for filing exclusions open, we shall be happy to discuss your potential petition.
5. Establish a Foreign-Trade Zone ("FTZ")
An FTZ is a federally-designated physical location within the United States (including U.S. territories) which for Customs purposes, and Customs purposes only, is considered to be outside the Customs Territory of the U.S. When merchandise enters an FTZ no import duty is collection. Duty because due when the merchandise leaves the FTZ to enter the commerce of the U.S. That means that merchandise entered into an FTZ and subsequently re-exported (whether or not advanced in condition, never enters the Customs Territory of the U.S. and, therefore, is never subject to U.S. import duty[6].
An Example
On October 24, 2018, Panasonic Eco Solutions Solar New York America (PESSNY) submitted an application to the FTZ Board in Washington, D.C. for its facility in Buffalo, New York, where they manufacture crystalline silicon photovoltaic cells, using imported silicon wafers and silver paste. These two materials to be used in the production of the solar cells are classifiable under 8-digit HTSUS subheadings included in the Federal Register Notice of September 21, 2018 published by the U.S. Trade Representative, which set a 25% tariff, in addition to regular tariffs, on these articles from China.
On April 2, 2019, PESSNY received approval from the FTZ Board. Now they can enter silicon wafers and silver paste into the FTZ and pay no import duty. When they subsequently export, they never pay the duty.
Financial details of PESSNY's savings are confidential, but the 2019 Annual Report of the Foreign-Trade Zones Board to the Congress of the United States provides a range.
In 2019 PESSNY received into the FTZ $25 to $50 million of merchandise, of which $10 to $25 million was subsequently exported, and not subject to the 25% tariff on Chinese goods. Recall that they got FTZ approval after the first quarter of 2019; full-year savings may be even higher.
PESSNY also avoids duty on foreign-status components which become scrap/waste in the FTZ.
An initial analysis of your businesses’ import patterns is offered free of charge. This preliminary assessment will allow us to determine the best strategy to utilize if it’s established your business can benefit from any of the above mentioned opportunities. Contact Glenn at glenn@foreigntradezonesolutions.com or David david@agathonassociates.com or by calling David at 617-285-6004 or Glenn at 603-957-8247.
[1] See https://www.finance.senate.gov/imo/media/doc/Katherine%20Tai%20Senate%20Finance%20Committee%20QFRs%202.28.2021.pdf
[2] See 86 FR 13785, March 10, 2021.
[3] See 85 FR 85831, December 29, 2020.
[5] See in Binding Ruling Letter HQ H312767
[6] Note, there are restrictions regarding merchandise that has been advanced in condition and subsequently re-exported to Canada or Mexico.
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