COVID-19: New Section 301 Opportunities

On Friday, the Office of the United States Trade Representative issued two Section 301 related notices that all companies that import from China should review. Response to Coronavirus Crisis United States Trade Representative

The first is a notice announcing that the USTR is soliciting public comments on whether “further modifications to the 301 tariffs may be necessary” to help fight COVID-19. USTR-2020-0014-0001  According to the notice, throughout the Section 301 process, the USTR has prioritized health considerations when making decisions about which products to hit with additional duties.  For example, the United States did not impose additional duties on several different types of medical equipment and has granted product exclusions covering other health-related products.  Given the unprecedented challenges presented by COVID-19, the USTR is now requesting public comment on whether duties should be removed from any additional medical-care products.  The USTR is asking commenters to address how an identified product “relates to the response to the COVID-19 outbreak.  For example, the comment may address whether a product is directly used to treat COVID-19 or to limit the outbreak, and/or whether the product is used in the production of needed medical-care products.”  Importantly, the notice states that comments may be submitted “regardless of whether the product is subject to a pending or denied exclusion request.”  Accordingly, any company that imports articles that can be directly or indirectly helpful in the fight against COVID19 should take advantage of this opportunity to submit comments.  The public docket will remain open until June 25, 2020 (but people should act quickly). 

The second is an extensive list of new product exclusion approvals under List 3.  The approvals cover 203 separate product exclusion requests and have been translated into 1 10-digit subheading and 176 specially-prepared product descriptions.  The approvals cover agricultural products, chemicals, parts and components for manufactured items and consumer goods.  Given that the approvals can be used by any company that imports an article covered by the approval (not just the requestor), all companies should be reviewing the list of approvals to see if they can benefit.  The approvals date back to September 24, 2018 and are valid to August 7, 2020.  A copy of the notice is attached.  $200_Billion_Exclusions_Granted_March_20_2020

These notices represent potentially meaningful opportunities for many companies.  If you would like to discuss submitting comments and/or seeking Section 301 refunds based on published approvals, , please let us know.

Extensions for Section 301 Product Exclusions

We are writing to highlight for you an important element of the Section 301 product exclusion process that you should not overlook – namely, that (i) approved product exclusions are available for use by any company that imports merchandise meeting the conditions of the approval (e.g., meets the narrative description and falls within the identified tariff classification contained in the approval); not just by the requester, and (ii) while temporary, product exclusion approvals may be extended for up to an additional 12 months.

For each of the 4 lists of products subject to the Section 301 duties, the U.S. Trade Representative (“USTR”) has run a product exclusion process.  The exclusions that are approved during this process are product-specific (not requestor-specific).  That means that approved exclusions can be used by any company that imports merchandise meeting the conditions of the approval.  Generally, there are two conditions in each approval:  (1) a narrative product description; and (2) an identified tariff classification (in some cases, the approval covers all products classified within an identified 10-digit tariff classification).  If the conditions of the approval are satisfied, any importer can utilize the approval and avoid the Section 301 duty.  We recommend that all companies that have been paying the Section 301 duties go through the exercise of identifying whether there are any approved exclusions they can take advantage of.  If there are, then, since the approvals date back to when the additional duties went into effect, consideration should be given to filing refunds requests with U.S. Customs and Border Protection (“CBP”).  Given that there have been more than 20 rounds of product exclusion approvals issue thus far, it can be hard to identify the specific approvals you may be able to utilize.  We have a simple macro that can be applied to your import data to identify possibly-applicable product exclusions.  If you would like assistance identifying possible approvals and/or filing refunds requests with CBP, please let us know.

In addition, any company currently utilizing approved product exclusions should be preparing to participate in the public comment process for extension.  As mentioned above, the product exclusion approvals are temporary.  The approvals generally apply retroactively back to the date the duties went into effect, and then going forward for a year from the date the approval is published in the Federal Register.  Since the prospects for a “Phase Two” deal with China are not very good, it is likely that the Section 301 duties will be with us for the foreseeable future.  This means that most of the temporary product exclusions will expire and that the additional duties will eventually snap back into place.  Thus far, the USTR has solicited public comments on whether to extend the first 4 rounds of product exclusion approvals (all issued under List 1) and is expected to adopt similar procedures for the remaining rounds of approvals.  The USTR generally requests public comment on whether to extend an approval 2 months or so before the approval is scheduled to expire.  Any company that is currently utilizing an approval should know when it is scheduled to expire and begin preparing to participate in the public comment process now.  In particular, companies should be thinking about why the extension is needed (e.g., why is still necessary to source the product from China, what have you do to explore alternative sources of supply, etc.), looking at the import data to identify other possible sources of supply, who else can submit comments in support of a request for an extension (e.g., customers, etc.).  We are helping numerous clients with this process and would be happy to discuss this with you further.

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

Take the Money and Run

Earlier today, the United States and China each confirmed that the two countries had reached a “Phase One” deal in their on-going trade war.  While the specific terms of this deal are not yet available, it seems reasonably certain that it will include the following:

United States

(1) the List 4B additional duties of 15% scheduled to go into effect this Sunday, December 15th, will be suspended (although, given that those duties were imposed by an earlier Federal Register notice it is not clear how that can be stopped without another Federal Register notice being published, which has not happened yet).

(2) the List 4A additional duties of 15% will be reduced to 7.5% as of . . . we do not know when yet (but presumably one day next week — also to be reflected in a yet-to-be issued Federal Register notice).

(3) the List 1, 2 and 3 additional duties of 25% will remain in place.

China

(1) the USTR announcement says that China will make “substantial additional purchases of U.S. goods and services in the coming years.”  This is noteworthy because recent reports had the U.S. administration pushing for China to purchase a specific amount (i.e., $50 billion worth) of U.S. agricultural products in 2020.  A commitment to make an undefined amount of additional purchases over multiple years is a far cry from a commitment to purchase $50 billion worth of AG products in 2020 [it is being reported that China has agreed to purchase $32 billion of U.S. AG products over the next two years; in 2017 (pre-trade war), China purchased $24 billion of U.S. AG products), so, if true, that does not seem like such a great deal].

(2) the USTR announcement also says that China has committed to making “structural reforms and other changes to [its] economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange.”  This is great, but obviously not very specific.  The devil is always in the details.

(3) also agreed to suspend some of its retaliatory tariffs on U.S. imports, effective December 15th.

So, what should you take away from this?  Not much, unfortunately.  While the reduction in tariffs will be welcome to many (as will the increased AG purchases will be to U.S. farmers), this Phase One deal does not appear to meaningfully address the underlying issues (e.g., subsidies, forced tech transfers, theft of IP, market access issues, etc.) or to reduce the uncertainty in U.S.-China trade relationship going forward.  It is likely that the tariff reductions announced today are conditioned on China meeting its commitments under the agreement.  As a result, there is a real possibility that these duties could snap back into place at some point in the future with little-to-no notice (in a late night tweet, perhaps?).  It is certainly possible that future rounds of negotiations will resolve the tough issues that remain and provide companies with more certainty regarding the future; we just do not think that is likely.  Instead, we think this (i.e., additional duties on some products and general uncertainty) likely represents the new status quo for the U.S.-China trade relationship (at least in the short-to-medium term) and companies should plan accordingly.

We hope that this update is helpful.  We will keep you posted on further developments (e.g., publication of a Federal Register notice or release of the text of the agreement).  In the meantime, please let us know if you have any questions.

Section 301 — Possible Renewal of Product Exclusion Approvals?

The Office of the U.S. Trade Representative is considering whether to extend previously-approved Section 301 product exclusions and is soliciting public comment during the month of November.  A copy of the notice is attached for your reference. (Request_for_Comments_Concerning_the_Extension_of_Particular_Exclusions)

In summary, the first batch of approved Section 301 product exclusions are set to expire in just under 2 months (i.e., on December 28, 2019).  The USTR is considering whether to extend particular exclusions in that first batch for up to 12 more months.  The evaluation will be on a case-by-case basis and will focus on factors such as (i) whether, despite the duties, the product is still available only from China, (ii) changes to the global supply chain since the duties went into effect, (iii) efforts made since the duties went into effect to source the product from the United States or third countries, (iv) whether the imposition of duties would cause severe economic harm to the requestor or other U.S. interests, etc.

While this is a positive sign in one sense (up until now, there had been no indication that the Administration was even willing to consider extending/renewing any of the product exclusions), it also means that the Administration believes that there is at least a meaningful chance that the U.S.-China trade war will carry on and that the Section 301 duties will remain in place well into 2020.

Any company that is relying on an approved product exclusion from the first batch of approvals should consider filing comments with the USTR.  We expect that the bar for securing a renewal/extension may well be higher than it was to secure the original approval (i.e., the need to answer the question why you still need the exclusion a year later).  Companies relying on other approved product exclusions (those not from the first batch) also should watch this process closely.

We hope that this is helpful.  If you have any questions about these issues, please let us know.

Section 301 — The List 4A Product Exclusion Process

Further to our post on October 12, the U.S. Trade Representative posted on its website today a notice detailing the product exclusion process to be followed for List 4A.  A copy of the notice is attached for your reference.  Procedures_for_Requests_to_Exclude_Particular_Products_from_the_August_2019_Action

Product exclusions petitions must be submitted via the portal set up for this purpose, and the process generally mirrors that used for List 3 (there are a couple of differences on the product exclusion petition form including:  (i) specifying whether the products are subject to an AD/CVD order issued by the Department of Commerce; and (ii) specifying the number of employees in the company and the number of employees potentially affected by the tariff).  The portal will open for submissions at noon (ET) on October 31, 2019, and will remain open until 11:59 pm (ET) January 31, 2020.  Any approved exclusion will be effective for one year, starting from the September 1, 2019 effective date of the List 4A tariffs.

Any company impacted by List 4A should consider filing a petition once the portal opens.  The USTR has granted a meaningful number of petitions filed on articles covered by earlier lists and the time and effort that goes into preparing a petition is generally pretty reasonable.  We have assisted numerous clients file such petitions and would be happy to assist or otherwise answer any questions you have about the process.

Section 301 — The Phase 1 Agreement (i.e., The Pressure Release Valve Deal)

After two days of high-level negotiations in Washington this past Thursday and Friday, the U.S. and China reached a “Phase 1” agreement in the on-going trade war.  The agreement will take several weeks to “paper” (according to President Trump), but here is what (we think) we know thus far:

* The United States will not increase the duty rate on Chinese-origin articles included on Lists 1, 2, and 3 from 25% to 30% on October 15, 2019, as proposed. 

 * No change yet to the imposition of additional duties (@ 15%) on Chinese-origin articles included on List 4B.  Those duties are scheduled to go into effect on December 15, 2019.

 * China will purchase an additional $40-50 billion in U.S. agriculture products (while it is not yet clear over what time period this applies to – one year, several years, etc., the president recommended that the “farmers immediately go purchase more land and get bigger tractors.”).

 * According to President Trump, progress was also made on intellectual property, financial services, SPS requirements for imports into China, currency manipulation, tech transfer and other issues, but no further details were provided.  When it comes to enforcement (which has been a big sticky point in the negotiations to date), the USTR stated that the two sides are “close” to agreeing on a workable dispute settlement mechanism.

 * Issues related to Huawei (and other Chinese companies recently added to the entity list) are not part of this deal.

Focusing on the positive, the duties on articles included on Lists 1, 2 and 3 will not be increased by 5% this coming week, as previously proposed.  In addition, U.S. farmers should get some needed relief (although, I am not sure I would go buy more land or get bigger tractors just yet).  Most importantly, maybe, is the fact that this “Phase 1” agreement releases some of the pressure that was building in the relationship.  It may also create some positive momentum for the two sides to reach a larger overall deal.

That said, it still remains to be seen whether the hard issues underlying this dispute (e.g., the structural changes the United States was asking China to make with regard to intellectual property protection/forced technology transfers, etc., and how such an agreement can be enforced) can actually be addressed (color me skeptical).  More likely, this should be viewed as a ‘pressure release valve’-type agreement that allows both sides to declare (partial) victory and move on to other issues (which, for the United States, includes seeking passage of the USMCA by Congress, the blossoming trade dispute with the EU, among other things).  In short, while the agreement is a positive step, we will have to wait and see what steps follow (if any).

This Phase 1 agreement does not meaningfully reduce the uncertainty involved in the overall U.S.-China trade relationship.  The best that can be said, at this point, is that it may reduce the risk of further escalation in the short term.  Resolution still seems to be a far ways off.  We also need to keep in mind that U.S. trade policy can change quickly and dramatically (e.g., a little over a month ago, President Trump tweeted:  “We don’t need China and, frankly, would be far better off without them . . . Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”; earlier today he tweeted:  “The deal I just made with China is, by far, the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country.”).  While the trade landscape 3 years from now may not look like it does today, it is also unlikely to look like it did 3 years ago.  Companies need to be planning and acting accordingly (e.g., continue with your short, medium and long-term tariff mitigation strategies).

We hope that this is helpful.  If you have any questions about these issues, please let us know.

International Trade Update

As you know, there is a great deal going on in the trade world right now.  Some (including me) would say that we are in the midst of a paradigm shift on international trade that will have a meaningful impact on how companies operate in the future.  Since we all have a tendency to get caught up in the day-to-day developments, I thought it might be useful to step back for a minute and provide some thoughts on what you should be watching for in the coming months.

Ratification of USMCA – this appears to be the Administration’s best chance for a trade “win” in the near term.  The USTR has spent a great deal of time working with Congress to iron out concerns with the agreement.  It will be interesting to see whether a Democrat-controlled House of Representatives is willing to move the agreement in a presidential election year.  If not, it will be interesting to see whether the president, in an effort, to change that calculus, revives his prior threat to withdraw from NAFTA unless Congress votes on USMCA (i.e., it is USMCA or nothing).

A Possible U.S.-Japan Trade Agreement – the Administration has also been working on a limited trade agreement with Japan and negotiations are pretty far along.  The impetus behind these negotiations are undoubtedly the threatened tariffs on autos/auto parts under Section 232 (more on that below).  There appears to be a good chance that the two sides will reach an agreement on a limited trade deal this fall that addresses auto/auto part imports into the United States (possibly similar to the USMCA side letters on autos), some agriculture issues and trade in industrial goods.

Other Possible U.S. Trade Agreements – in recent weeks, the Administration has talked about pursuing possible trade deals with Brazil and the United Kingdom (post-Brexit).  While trade agreements with these countries present different challenges (and likely have very different timelines), they represent new opportunities that people should be following.

U.S.-EU Trade Issues – there are many points of trade friction between the United States and the European Union at present and several of those are going to come to a head in the very near future.

The United States is waiting for the WTO to confirm the amount of countermeasures it may impose as a result of the EU’s failure to comply with WTO rules related to aircraft subsidies.  The United States requested permission to impose additional duties against EU products worth $11.2 billion a year and a decision is expected at any time.  Once this decision is issued, we expect that the United States will move quickly to impose additional duties of up to 100% on select imports on a ‘carousel’ basis (e.g., 100% duties on a list of products that rotates every 3 months) until the dispute is resolved.  The EU has its own WTO aircraft subsidies case against the United States and will likely impose its own additional duties once a final decision is reached (the EU has asked the WTO for permission to impose countermeasures on U.S. imports worth $12 billion).

In addition, the clock is ticking on the Section 232 auto/auto parts investigation.  As you recall, back in mid-May, the Administration announced that imports of automobiles and auto parts “threaten to impair the national security of the United States” and that the USTR would pursue negotiations with the EU, Japan and any other country deemed relevant on voluntary export restraint agreements.  The USTR was given until November 13, 2019 to conclude those negotiations.  If agreements are not reached, then the President would consider imposing other measures on imported autos/auto parts (e.g., additional duties, etc.).  To date, we understand that the United States and Japan have engaged in meaningful negotiations and have a chance of reaching a deal (discussed above).  In contrast, it does not appear that discussions with the EU have progressed in any meaningful way.  As a result, all companies that import autos or auto parts should be prepared for the imposition of additional duties or other border measures.  If the United States imposes such measures, then we expect that the EU and other impacted jurisdictions will retaliate against U.S. imports (and likely not just against autos/auto parts).

U.S.-China Trade War – the U.S.-China Trade War continues on.  The two sides continue to talk (the goods news), but do not seem getting meaningfully closer to a deal (the bad news).  In the meantime, additional duties are scheduled to go into effect on September 1st and December 15th.  U.S. farmers and agricultural interests are hurting, and companies that did business with Huawei are scrambling.  While the Administration continues to profess that the trade war is not hurting the U.S. economy, it is also calling for the Federal Reserve to cut interest rates further, and now considering (reportedly) tax cuts (or maybe not, who knows).  Given that the U.S. is heading into an election year, and that China is celebrating the 70th anniversary of the founding of the PRC, it seems unlikely that a grand deal will be reached anytime soon.

In addition to these issues, you also have to keep an eye on Brexit, the Japan-South Korea trade dispute, the African Continental Free Trade Area, France’s digital tax (and the likely U.S. retaliation), the EU-Mercosur trade agreement, the Regional Comprehensive Economic Partnership in Asia, U.S. Customs and Border Protection’s enforcement of forced labor issues, the Miscellaneous Tariff Bill process opening in the fall of 2019, and other trade developments.  While there are a lot of challenges in the world of international trade, there are also a lot of opportunities.  While the world 3 years from now may not look like it does today, it is also not going to look like 3 years ago (when everyone just assumed it would always get easier and cheaper to move goods, people and data around the world).  Since the road ahead will continue to be bumpy, it is more important than ever that you (and your companies) stay on top of these developments in order to stay in the race.

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