Further to the below, while there were some mixed signals sent yesterday, the Administration clarified today that the imposition of the section 301 duties is being suspended. It is being reported that China and the United States have made enough progress in negotiations to warrant suspending the imposition of tariffs (as well as China’s retaliatory tariffs) for now.
While this is a positive development, it is also subject to change. As a result, for now, we are recommending that companies continue to pursue exclusions just in case.
If you have any questions, please let us know.
Further to the below, we wanted to provide a brief update on the Section 301 situation and request your assistance.
First, the update. Roughly, 2,900 comments were submitted in response to the list of Chinese-origin articles the USTR proposed to subject to an additional 25% duty upon importation into the United States. The comments were both opposed to, and in favor of, the imposition of additional duties (with the vast majority being opposed either broadly, or with regard to the inclusion of specific articles on the proposed list). A 3-day hearing was also held this past week where approximately 125 individuals provided verbal comments either in opposition to, or in favor, of the additional duties. Rebuttal comments are due this coming Tuesday, May 22nd.
Now the request — we assisted several clients prepare comments and testimony opposing the imposition of the additional duties. We also assisted these clients in discussions with their respective Congressional delegations and were able to get commitments of support. We advanced several different arguments during this process, but one, in particular, seemed to resonate especially well. Based on that positive feedback, we wanted to follow-up with all of you to see if your companies are similarly-situated and, if so, if you would be willing to join our effort to gain a broad-based exemption.
In short, we requested that USTR categorically exempt from the proposed additional duties products manufactured in China by wholly foreign-owned enterprises (“WFOEs”).
As explained in greater detail in our previous updates (below), the USTR concluded that China used foreign ownership/joint venture requirements, compulsory technology transfers, the acquisition of U.S. companies and assets, etc. to obtain cutting edge U.S. technology and that those practices were “unreasonable or discriminatory and burden or restrict U.S. commerce”[.] It was then determined that the “appropriate” remedy “to obtain the elimination” of those practices was to impose an additional 25% duty on the identified articles. So, stated simply, the USTR’s goal is to identify articles on which the imposition of additional duties will force China to change its unfair policies.
WFOEs, which are, by definition, owned entirely by non-Chinese entities, are not subject to the ownership restrictions (i.e., a WFOE does not have a joint venture partner). WFOEs in most industries are also not subject to compulsory technology transfer through government licensing, for example. As a result, the imposition of additional duties on articles produced in China by WFOEs will have no impact on Chinese government policy (i.e., there is no “forced” technology transfer when the manufacturer involved is a WFOE, therefore, assessing duties on articles produced by a WFOE does not make sense).
Accordingly, we requested that the USTR categorically exempt from any Section 301 duties articles produced in China by a WFOE. We also pointed out that such an exemption would be easily administrable from a customs perspective. A new ‘special program indicator’ could be created that, when used, meant that the importer was certifying that the articles being imported were produced by a WFOE (similar to how claims are made now under our more recent free trade agreements). Such a certification would be subject to audit/verification by U.S. Customs and Border Protection. The manufacturer identification (or MID) codes could also be used to help ensure that only articles produced (not just sold) by the WFOE were entered under the exemption.
We believe that such a request has a meaningful chance of success for a couple of reasons. The first is that exempting articles produced by WFOEs is consistent with the Section 301 determination (i.e., the goal is to get China to lift its restrictive ownership requirements so U.S./foreign companies can operate without local joint venture partners; WFOEs are already entirely foreign owned). Second, this exemption request is a lot easier to justify than picking and choosing among the large number of compelling stories U.S. companies told in the context of their HTS-specific requests (i.e., assuming the USTR wants to provide some exemptions, our categorical request would be easier to grant than picking and choosing from among the numerous HTS-specific requests companies made). Finally, it is also administrable.
As mentioned, our WFOE exemption has received positive feedback at a number of levels. Accordingly, if you are opposed to the imposition of the Section 301 duties (either because you are on the list in this round, or you fear being on the list in the next potential round) and the articles you import are produced by a WFOE, please let us know. Regardless of whether you filed comments already or not, we believe that you have the opportunity to engage with the Administration on this issue as part of our coalition.
We hope this is helpful. If you have any questions, please let us know.