The Office of the United States Trade Representative (USTR) recently imposed additional tariffs of 10 percent or 25 percent on three different lists of thousands of imports from China, due to offending trade practices. Companies have until October 9 (for List 1) or December 18, 2018 (for List 2) to submit a request for exclusion from these tariffs.
Below is a summary of the process by which companies can request exclusion from these tariffs. Companies should also consider the various options that might be available to mitigate or reduce the impact of the tariffs.
I. The Section 301 tariffs
At the request of the President, the USTR has conducted an investigation into Chinese acts, policies and practices of concern to the United States (including forced technology transfer, intellectual property theft and other acts, policies and practices, such as the Made in China 2025 strategy) under section 301(b) of the Trade Act of 1974. As a result of this investigation, the USTR has now finalized three lists of Chinese products that are subject to additional duties. These tariffs can have an effect on a company's bottom line as well as its supply chain.
List 1 was published in the Federal Register on June 20, 2018 and encompasses 818 tariff lines of Chinese products representing approximately $34 billion in annual import value. Items on List 1 are subject to additional duties at a 25 percent ad valorem rate effective on July 6, 2018.
List 2 was published in the Federal Register on August 16, 2018 and consists of 279 tariff lines of Chinese products representing approximately $16 billion in annual import value. Items on List 2 are subject to additional duties at a 25 percent ad valorem rate effective on August 23, 2018.
List 3 was published in the Federal Register on September 21, 2018 and reflects 5,745 tariff lines of Chinese products representing approximately $200 billion in annual import value. Items on List 3 are subject to additional duties at a 10 percent ad valorem rate effective on September 24, 2018, which will increase to 25 percent on January 1, 2019.
II. The process for requesting exclusions from the tariffs for articles on List 1 or 2
The USTR has implemented exclusion processes with respect to List 1 and 2 (but not List 3). Companies or trade associations have until October 9, 2018 to submit exclusion requests for items on List 1 and until December 18, 2018 to submit exclusion requests for items on List 2. The exclusion process under both Lists 1 and 2 is product-specific and any exclusion granted will apply to the particular article described in the exclusion request (not all articles classified under the relevant subheading of the Harmonized Tariff Schedule of the United States). Multiple products require multiple exclusion requests.
The USTR has provided forms for exclusion requests and such requests must be submitted electronically. If an exclusion is granted, it will apply retroactively to the original effective date of the additional duties and will be valid for one year after the exclusion is published in the Federal Register.
In addition to identifying information regarding the specific article covered by the exclusion request, the USTR is requiring the requester to provide information regarding the annual quantities and values for the Chinese article that the requester purchased over the past three years. For imports sold as final products, the USTR is also asking for the percentage of total gross sales by the requester in 2017 accounted for by sales of the Chinese-origin product. For imports used in the production of final products, requesters must provide:
- the percentage of the total cost of producing the final product(s) accounted for by the Chinese-origin input and
- the percentage of their total gross sales in 2017 accounted for by sales of the final product(s) incorporating the input.
With respect to the rationale for an exclusion request, the USTR has stated that parties should address the following three factors:
- whether the particular product is available only from China, or whether it is available from sources in the United States and/or in third countries
- whether the imposition of additional duties on the particular product would cause severe economic harm to the requester or other US interests and
- whether the particular product is strategically important or related to "Made in China 2025" or other Chinese industrial programs.
Requesters may also provide any other information or data that they consider relevant to an evaluation of the request.
After a request for exclusion is posted, interested parties will have 14 days to submit responses indicating support or opposition to the exclusion request. In addition, interested parties then have the opportunity to submit a reply to any response generally within 7 days after the close of the 14-day response period
III. Possible options to mitigate the impact of the additional duties
Importers and purchasers of articles originating from China should assess their supply chains to determine whether past or future imports consist of items included in List 1, 2 or 3 and thus are subject to the additional duties. For each article, they should evaluate possible steps to eliminate or mitigate the impact of the duties. Such steps can include sourcing an affected article from another country (or the United States), evaluating whether to seek an exclusion for an article on List 1 or 2, or other mitigation efforts. For items on List 3, parties could consider efforts to persuade the USTR to implement an exclusion process or to take other steps to remove the article from being subject to the additional duties.
With respect to mitigating the negative impact of these tariffs, below is a list of possible options that companies may wish to evaluate:
- Consider whether there are possible changes in tariff classification. For example, List 3 breaks down certain subheadings into subheadings covered by the additional tariffs and subheadings that are not covered. Thus, parties could consider whether products of concern can be properly classified in a subheading that is not subject to the additional tariffs.1
- Determine whether the imported product is eligible for classification under a provision in Chapter 98 of the Harmonized Tariff Schedule of the United States (HTSUS), which can result in either a full or partial exemption from the Section 301 tariffs.2
- Review processing operations for country of origin and consider changing processing operations to effect a change in the country of origin (to a country other than China), called "substantial transformation."3
- Consider alternatives to current purchase arrangements with a view towards affecting customs value.4
- Consider alternative methods for importations into the U.S. when such imports are further processed and then exported or when imported for distribution (exportation) to other countries, whereby no duties are paid on the importation of such goods if properly exported. These include importations into a bonded warehouse for exportation, importation into a Foreign-Trade Zone and importations under Temporary Importation Bonds when certain prescribed conditions are met.
- Finally, if the additional duties are paid, but there is a subsequent exportation of the imported product or an exportation of similar products, consider the applicability of the US drawback statute for filing claims for 99 percent refunds of the Section 301 duties paid upon entry of the covered products into the US. Under the drawback statute and subject to various requirements for documentation, drawback can be claimed either when the same imported products are exported or when there is an exportation of other products classified under the same 8-digit tariff subheading (excluding basket provisions) as the imported product subject to the section 301 duties.
For further information and questions regarding the issues discussed in this client alert, please contact the following members of our international trade team: Steve Phillips, Martin Schaefermeier, Sandra Bell, Rick Newcomb or Melanie Garcia.
1 For example, under subheading 8517.62 there is now a new statistical breakout, ie, subheading 8517.62.0090 for "other," covering every product classified in subheading 8517.62, other than modems and switching and routing apparatus, which is not subject to the new Section 301 tariffs. Therefore, in this example, if the imported product used to be classified under the predecessor statistical subheading 8517.62.0050, which under CBP rulings covered switches and routing apparatus (subheading 8517.62.0010 expressly covered "modems"), there is now a possibility that such product may be provided for in the new statistical subheading 8517.62.0090, if the product is not considered to be a switch or routing apparatus.
2 For all three lists of products subject to the Section 301 tariffs, the USTR has excluded certain Chapter 98 (HTSUS) eligible products, either partially or fully, from the additional tariffs.
3 If a company has the flexibility, it may consider moving a substantial part of the manufacturing and/or assembly operation currently performed in China to another country, so as to effect a change in the "name, character and/or use" of the components from China. If such a change occurred, the product would be considered to have undergone a "substantial transformation" in the second country, rendering that second country the country of origin for purposes of assessing the Section 301 tariffs.
4Since many of the products subject to the Section 301 additional tariffs are free of regular customs duties, companies may not have been closely attentive to the declared values and may instead have been overvaluing the products on their customs declarations. US law allows appraisement for duty purposes to be made based on the first sale for exportation to the US when such sale is made at arm's length (at least comparable to an arm's length transaction) and is clearly shown to be a sale for exportation to the US.