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."
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, 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,
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. 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.
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.
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.
