Section 301 — List 4 (Everything Else)

The U.S. Trade Representative’s Office made available this afternoon an advance copy of the notice that will be published in the Federal Register later this week beginning the process of imposing additional duties of up to 25% on all remaining imports from China (i.e., List 4).  List4  According to the notice, “[i]n light of China’s failure to meaningfully address the acts, policies, and practices that are subject to this investigation and its response to the current action being taken in this investigation, and at the direction of the President, the Trade Representative proposes to modify the action being taken in this investigation.”  The modification being proposed is imposing additional duties of up to 25% on “essentially all [Chinese-origin] products not currently covered” by one of the previous lists.  This new “List 4” covers approximately $300 billion worth of imports from China and includes, for example, subheading 8517.62.0090, HTS which was created in an earlier phase of the investigation and excluded from duties at that time.  Articles such as pharmaceuticals, pharmaceutical inputs, select medical goods, rate earth materials and critical minerals are excluded; as are articles covered by previously granted product exclusions.

 Before taking such action, the USTR is soliciting public comments like was done in previous phases of this investigation.  There will be an opportunity to participate in a public hearing that will begin on June, 17, 2019, as well as to submit written comments.  The notice asks that interested parties address:

(1) the tariff subheadings to be subject to increased duties (whether the ones included in the Annex to the notice should be retained or removed, or others not on that list added);

(2) what the appropriate additional duty rate should be (i.e., 25% or something less); and

(3) whether the entire ~$300 billion in imports should be targeted, or something less.

 For (1), the USTR asks that commenters specifically address “whether imposing increased duties on a particular product would be practicable or effective to obtain the elimination of China’s acts, policies, and practices, and whether imposing additional duties on a particular product would cause disproportionate economic harm to U.S. interests, including small- or medium-size businesses and consumers.”

 In terms of timing, we expect that the hearing will last at least one week.  Rebuttal comments are due 7 days after the close of the hearing.  Based on this timing, the Administration would not be in a position to impose the additional duties until after President Trump and President Xi have the opportunity to meet at the G20 summit in Japan (June 28-29th).  That means there is a (slim) chance that, if negotiations continue in the meantime, that a final resolution can be reached at that meeting and these additional duties will never be imposed.  Obviously, however, no one can bank on that happening.  As a result, all companies that are impacted by List 4 should participate in this process.  There seems to be genuine misunderstandings within the Administration over issues such as ‘who pays the additional duty’ and how quickly U.S. companies can modify their supply chains.  Participating in the process offers the chance to clear this up.  In addition, we believe that participation in the public hearing can help (somewhat) with the product exclusion process (which, if the additional duties are set at 25%, should be created at or around the same time).  While we do not expect that many articles will actually be excluded based on public participation given the current state of US-China trade relations, we nevertheless believe it is important for all companies to participate in one form or another.

 To paraphrase Winston Churchill, this is not the beginning of the end, but is hopefully getting us closer to the end of the beginning.  If you have any questions, or if you would like to discuss participating in the process, please let us know.



Section 301 — Increase in US Duties (Further Update)

Further to our earlier post today, the U.S. Trade Representative’s Office released late last night another notice that attempts to address the ‘shipments on the water’ issue (i.e., shipments exported from China before 12:01 am ET this morning, but entered for consumption in the United States on or after 12:01 am ET this morning). 

 The notice, which will be published in the Federal Register shortly, provides that such shipments will be subject to the 10% duty rate so long as they are entered for consumption, or withdrawn from warehouse for consumption, prior to June 1, 2019 (i.e., in the next 3 weeks).  The notice creates a new HTS subheading for such shipments.  A copy of the notice is attached for your reference.  Implementing_Modification_to_Section_301_Action

 Assuming that the new HTS subheading is available in the system, this obviates the need for importers of these shipments to pay the 25% duty and claim a refund, or delay the filing of the entry summary, as suggested in CBP’s CSMS message from yesterday.

 On a related note, the negotiations are continuing here in Washington, DC today.  We are expecting further updates (or at least tweets) over the weekend.  Also, in response to the increase in duty rate from 10% to 25%, China announced that it was ready to take “necessary countermeasures” but did not specify what those countermeasures will be.  Stay tuned.  Interesting times.

 We hope this update is helpful.  If you have any questions, please let us know.

Section 301 — Increase in US Duties on List 3 and Exclusion Process

Further to the below, attached is an advanced copy of the notice announcing that the 10% duty on articles included on List 3 will increase to 25%.  2019-09681  The notice also announces that, as promised, now that the duty rate is going to 25%, the U.S. Trade Representative will establish a product exclusion process for articles on List 3 (like has been done for articles included on Lists 1 and 2).  The notice is scheduled to be published in tomorrow’s Federal Register.

 Interestingly, there appears to be some wiggle room on the effective date for the duty increase.  The notice contains multiple references to the 25% rate becoming effective this Friday, May 10, 2019.  For example, the notice states:

The Annex to this notice amends the Harmonized Tariff Schedule of the Unites to provide that the rate of additional duties for the September 2018 action [i.e., List 3] will increase to 25 percent on May 10, 2019.

 The Annex (unlike previous Federal Register notices imposing the Section 301 duties), however, includes two separate conditions for the increase in duties to take effect.  Specifically, it states:

Effective with respect to goods (i) entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on May 10, 2019, and (ii) exported to the United States on or after May 10, 2019, subchapter III of chapter 99 of the Harmonized Tariff Schedule of the United States is modified . . . .

As a result, it appears that in order for the 25% duty rate to apply, the imported merchandise must be entered for consumption after 12:01 am ET Friday morning AND have been exported to the United States on or after Friday, May 10th.  So, an entry of merchandise included on List 3 exported from China prior to May 10th would not be subject to the 25% duty rate even if it was entered after 12:01 am Friday (it would still be subject to the 10% rate). 

 While this will likely be a welcome accommodation to companies with shipments on the water, it may lead to some confusion at the border.  Presumably, U.S. Customs and Border Protection will issue further guidance on the type of proof needed to demonstrate that a given shipment was exported to the United States before May 10, 2019 (e.g., bills of lading, etc.).


If you have any questions about these issues, please let us know.


Further Flare Up in US-EU Trade War

Further to our earlier post, and as expected, the European Commission released today a preliminary list of U.S.-origin products that it is considering subjecting to additional duties upon importation into the European Union as a result of the dispute with the United States over aircraft subsidies (copy attached – tradoc_157861 (1)).  The EC has requested authorization from the WTO to adopt countermeasures (e.g., duties) worth up to $12 billion.  This WTO has appointed an arbitrator to determine the appropriate level for the countermeasures and it will be sometime before a final decision is reached.  In the meantime, the EC published this preliminary list.  It advised that it is considering imposing additional customs duties of up to 100% on products covered by the final list and that, it is accepting public comments through May 31, 2019.  The list includes food items (e.g., fish, fruits, juices, ketchup, sauces, wines, spirits, etc.), coal, chemicals, medical supplies, polymers and plastics, handbags, briefcases, suitcases, construction equipment, tractors, parts for motorcycles and for bicycles, games, etc. 

 All companies that trade with the EU should review the attached list and consider their options (including working with affiliates or customers in the EU to file comments on the proposed list). 

 We have a great deal of experience working through these issues, both here in the United States and in the EU, and would be happy to answer any questions or otherwise help you worth through this. 

 We hope this is helpful.


Year-End Transfer Price Adjustments – Don’t Forget the Customs Valuation Implications

Just a quick reminder for those of you working at multinational companies which operate on a calendar year basis – do not forget to ask your tax colleagues whether any retroactive transfer pricing adjustments were made at, or before, year-end (assuming that they do not send this information to you on their own).  This is particularly important this year in light of the significant, unexpected cost increases many companies faced in 2018 as a result of the Trump Administration’s trade policies.  For example, the Section 232 duties imposed on steel and aluminum imports, and the Section 301 duties on imports of Chinese-origin goods, were not foreseen when the transfer prices were set in late 2017.  As a result, the additional duty expense these actions represent may have skewed a company’s results for the year, thereby making it more likely that a retroactive transfer price adjustment was needed in order to maintain the arm’s length nature of the transactions.

 If such adjustments were made (whether upward or downward), please be sure to consider the customs valuation implications here.  The failure to declare upward transfer pricing adjustments is a very common enforcement issue in many jurisdictions (largely because the issue is so easy to identify and often involves significant amounts/penalties); whereas downward adjustments could lead to a refund of customs duties, taxes and fees in some jurisdictions (including the US, Canada, etc.).  A quick note to your tax colleagues now could save a potential headache down the line, or put some money back in the company’s pocket. 

 We regularly assist clients with (i) the internal discussions with tax to identify whether any adjustments or other additions to value exist, and (ii) reporting any relevant adjustments/additions to value to Customs Authorities where needed.  If you would like any assistance with these issues, please let us know.


(Possible) Delay in Scheduled Increase in Section 301 Duties

As you have likely heard by now, President Trump announced this past Sunday that “substantial progress” has being made in the on-going trade talks with China; as a result, he will be delaying the scheduled increase in tariffs applicable to Chinese-origin goods included on List 3; and that both sides are planning “a Summit” at Mar-a-Lago (reportedly in late March) to “conclude an agreement.”  While additional details have yet to emerge, we wanted to share some initial thoughts with you on what to look for when they do.

 First, the duty rate applicable to articles included on List 3 is scheduled to increase from 10% to 25% on March 2, 2019 (i.e., this coming Saturday).  We believe that a Federal Register notice, presidential proclamation, or some other official statement will be issued this week confirming the delay (i.e., we do not believe that the scheduled tariff increase can be delayed by tweet).

 Second, in any deal, it will be important to pay particular attention to the enforcement mechanisms that are included.  If the Trump Administration’s goals include reducing the United States’ trade deficit with China, then including a unilaterally-imposable ‘snapback’ type of enforcement mechanism would help achieve that.  For example, if the United States reserves the right to re-impose duties if China fails to live up to its commitments in one or more areas (e.g., failing to stop engaging in cyber theft – something China has not admitted to doing in the first place), then that will create significant uncertainty for U.S. businesses, which should impact sourcing/investment decisions.  If duties of 25% could be imposed on the articles you purchase from a given country with little-to-no advance notice, would you continue sourcing from there, or would you look to eliminate that risk by sourcing from elsewhere?  Thus, even if a deal resolving the dispute is ultimately reached, it will be important to understand how the agreement will be enforced.  It is likely (in our view) that, even if a deal is reached, that trade with China will not return to what it was before.     

 Finally, it seems strange that President Xi would be willing to come to the United States to conclude such a deal given the appearance it creates.  Where a “summit” like this is held matters, in terms of public/political perception.  This is why such summits are usually held in a third country, so as not to give the appearance that one side has ‘won,’ or is more powerful than the other (compare the Trump-Kim summits held in Singapore and in Vietnam; the Reagan-Gorbachev summit held in Iceland; etc., to Holy Roman Emperor Henry IV kneeling in the snow in front of Pope Gregory II’s castle in Canossa).  It is not clear why President Xi would be willing to come to the United States (and to one of President Trump’s golf resorts, in particular) to conclude such a deal.  The optics on that within China cannot be good (of course, if China thinks it is getting a very good deal . . . ).

 Time (and the terms of the deal) will tell.

 We hope that this helps.  If you have questions, please let us know.


Section 301 Update

 The latest round of negotiations in the on-going trade war between the United States and China concluded yesterday in Washington, DC.  We are now less than a month away from the additional duties imposed on Chinese-origin articles included on List 3 increasing from 10% to 25%, and the possible initiation of a List 4 (the imposition of additional duties on the remaining $267 billion worth of Chinese-origin imports), so we thought it would be helpful to recap where we are and share some thoughts on where we may be going.

 To recap:  The U.S. administration determined under section 301 of the Trade Act of 1974, as amended, that China’s laws, policies, practices, and actions are unreasonable or discriminatory and are harming American intellectual property rights, innovation, or technology development.  Specifically, the U.S. concluded that China uses foreign ownership restrictions (e.g., joint venture requirements, etc.), restrictive technology licensing terms, strategic investment in, and acquisition of, U.S. companies and assets, and unauthorized intrusions, cyber theft, etc. to improperly obtain U.S. intellectual property, trade secrets and other confidential information. 

 Based on this, the U.S. took a number of measures in an effort to get China to change its behavior.  These measures included, among other things, the imposition of additional customs duties on Chinese-origin products imported into the United States.  So far, the U.S. has imposed additional duties on 3 separate lists of Chinese-origin products (List 1 =25%, List 2 = 25% and List 3 = 10%).  In response, China took retaliatory measures that included imposing additional customs duties on U.S.-origin products imported into the United States.

 Late last year, the two sides agreed to a temporary cease fire to allow negotiations to begin.  The two sides gave themselves 90 days (until March 1, 2019) to work out a resolution.  Since then, there have been a series of discussions/meetings, including the meetings that occurred this week in Washington.  If a deal is not reached, the additional duties imposed on Chinese-origin articles included on List 3 are scheduled to increase from 10% to 25%.  President Trump has also indicated previously that, if an agreement is not reached, the United States is ready to proceed with imposing duties on the remaining $267 billion worth of Chinese-origin imports (i.e., initiating a List 4).

 Resolving this dispute is a tall order, under the best of circumstances.  The U.S. administration believes that China needs to make structural changes to how it operates and that there needs to be strong enforcement mechanisms in place to ensure continued compliance.  In response, China has reportedly focused on purchasing more U.S. products and services over time (with one series of reports suggesting that China would increase its purchases of U.S. agricultural, energy and other products to eliminate the trade deficit with the United States within 6 years – a period that would coincide with a second term for the Trump administration).  By most accounts, the two sides are still far apart.  That said, President Trump is expressing optimism that a deal can be reached.  He has also said, however, that a final deal (and a great deal, it would be) could only be reached during an in-person meeting with President Xi.  Thus far, no such meeting is scheduled.

 As a result, we view that the two most likely scenarios are (1) the parties continue negotiating over the next month and make enough progress that further escalation is delayed until a meeting between President Trump and President Xi where the two sides declare victory and then retreat to their respective corners, and (2) not enough progress is made and the U.S. increases the duties on List 3 goods to 25%.  While both sides are interested in reaching a deal, the two sides are too far apart to expect that a substantive solution will be reached in the next 30 days.  The question is whether China’s offer to purchase more U.S. products and some small structural changes will be sufficient to get the U.S. administration to declare victory.

 If an agreement is ultimately reached, people should also watch how the other presidential candidates react.  As you know, the race for president has already begun and several of the Democratic Party candidates have expressed ‘economic nationalist’ sentiments.  It will be interesting to see if President Trump is criticized for being ‘soft on China’ if an agreement is reached that does not address the issues covered in the Section 301 report.

 We hope this is helpful.  If you have any questions about how best to cope with the Section 301 duties, please let us know.