Section 301 – China Responds

Dear Friends,

As expected, China announced yesterday that it will implement retaliatory tariffs of either 10% or 5% on $60 billion worth of U.S. products imported into China beginning September 24, 2018.  China’s action is in response to the U.S. announcement of its intention to implement the Section 301 List 3 tariffs.

The latest round of Chinese retaliatory tariffs will apply to products of U.S. origin that fall on four lists that China published on August 3, 2018.  China organized these four lists according to proposed tariff rates of 25%, 20%, 10% and 5%.  Based on its latest announcement, while the products have not changed, the tariff rates have.  China will impose a 10% retaliatory tariff on U.S. products on the 25% and 20% lists, and it will impose a 5% tariff on products on the latter two lists.  Links to these four lists are provided for your reference below.  While the lists are in Chinese, the products can be identified by their tariff numbers. 

U.S. Products to be Subject to 10% Tariff:

U.S. Products to be Subject to 5% Tariff:

Unlike the United States, China does not offer a formal process for importers to request product exclusions from the tariffs, and affected companies must explore other options to mitigate the impact of the Chinese retaliatory tariffs on their businesses, such as advocacy, changes to their sourcing and manufacturing strategies, and other duty planning methods.

Our trade team in China routinely assists companies evaluate their options and implement mitigation strategies to address the tariffs.  If you have questions, or if you would like to explore possible options, you can either contact us or reach out to Jon Cowley (jon.cowley@bakermckenzie.com) or Frank Pan (frank.pan@bakermckenzie.com) directly.  

We hope this update is helpful.

Best regards,
Ted

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Re: Section 301 — The U.S. Imposes Additional Duties on ~$200 Billion Worth of Chinese-Origin Imports

Further to the below, the USTR has now released the finalized List 3.  The USTR’s website provides as follows:

“The list contains 5,745 full or partial lines of the original 6,031 tariff lines that were on a proposed list of Chinese imports announced on July 10, 2018.  Changes to the proposed list were made after USTR and the interagency Section 301 Committee sought and received comments over a six-week period and testimony during a six-day public hearing in August.  USTR engaged in a thorough process to rigorously examine the comments and testimony and, as a result, determined to fully or partially remove 297 tariff lines from the original proposed list.  Included among the products removed from the proposed list are certain consumer electronics products such as smart watches and Bluetooth devices; certain chemical inputs for manufactured goods, textiles and agriculture; certain health and safety products such as bicycle helmets, and child safety furniture such as car seats and playpens.”

A copy of the complete list is attached here for your reference: Tariff List_09.17.18  It will also be published in the Federal Register later this week. 

Best regards,

Ted


Dear Friends,

President Trump announced today that the United States would be moving ahead to impose additional duties on a further $200 billion worth of Chinese-origin imports (referred to as ’List 3’).  According to the announcement, the additional duties will start at 10% and run through the end of the year.  If the matter has not been resolved satisfactorily by then, the rate will be increased to 25% on January 1, 2019.  The additional duties will become effective next Monday, September 24, 2018.  A copy of the Statement from the President is attached for your reference:

The additional duties will apply to Chinese-origin goods classified in the tariff subheadings included on the final list.  This list has not been published yet, but, given the effective date (a week from now), it is expected in the next day or two.  The Section 301 Committee has been considering the comments and testimony received on the list of 6,031 tariff subheadings originally proposed for List 3.  It is being reported that a relatively small number of tariff subheadings (a few hundred) are being removed from the final list as a result of this process.

Once the final List 3 is published, it is widely expected that China will retaliate by imposing additional duties on a list of U.S.-origin products worth approximately $60 billion.  It is also being reported that China may decline any invitation issued by the United States to begin negotiations until after the midterm elections and/or may engage other levers domestically to squeeze U.S. companies doing business in China.

If China does retaliate, the President’s statement says that the Administration “will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”  This would be List 4 and it would cover all of the remaining imports from China.

This is the latest (and undoubtedly not the last) salvo in the on-going trade war between the United States and China.  Unfortunately, it is hard to view this salvo as being effective.  Rather than force the parties to the table, an additional 10% duty is arguably offset by the declining value of the yuan (which is down high single-digit percentages in a year) and is likely going to be viewed as a sign of wavering resolve from a president in a contentious midterm election year.  In short, today’s announcement will likely prolong the trade war, rather than help bring it to a speedy conclusion (which, in all fairness, may be the plan after all – if the war drags on long enough, companies will start to leave the war zone . . .).

We hope this is helpful.  If you have any questions about the Section 301 duties (or China’s retaliation), please let us know.

Best regards,

Ted

The End of NAFTA?

Dear Friends,

President Trump announced earlier today that the U.S. and Mexico have reached a preliminary agreement on a new trade agreement. 

In a meeting with reporters from the Oval Office, and President Enrique Pena Nieto of Mexico on the phone, President Trump announced that the two countries have reached an agreement on new trade agreement.  According to the President, this agreement will be called the “U.S.-Mexico Trade Agreement” and it will replace NAFTA (which, the President said had bad connotations because it was such a bad deal for the United States).  The Administration intends to notify Congress this coming Friday of its attention to sign this new trade agreement (the Administration is required to notify Congress at least 90 days before signing any trade deal and President Nieto leaves office November 30th, which is ~90 days from Friday, so they are trying to get this in under the wire).

As for Canada, the two presidents seemed to express different views.  President Trump said that negotiations with Canada had not started yet, but would be begin shortly.  He also suggested that they would be short – saying that if Canada wants to negotiate fairly, we will do that; but that, if not, the United States will just impose a duty on Canadian-made automobiles (presumably under the on-going Section 232 investigation).  He also said that any deal could be a separate deal, or it could be integrated in to the new U.S.-Mexico trade agreement.  President Pena repeated stated that Mexico’s intention was to have a trilateral agreement that included Canada (not two separate bilateral deals, as seems to President Trump’s preference).

The fact sheets put out by the USTR on the U.S.-Mexico Trade Agreement are available here.  A video of the meeting in the Oval Office is available on C-SPAN’s website.

While this is a momentous development, there are a few things to keep in mind.  First, the United States (and possibly Mexico?) appears to be willing to move forward without Canada.  It seems increasingly likely that President Trump intends to use his leverage (over autos, in particular) to present Canada with a ‘take it or leave it’ offer.  If Canada is not willing to accept President Trump’s terms, it is not clear whether Mexico would be willing to forego an agreement with the United States (that seems less likely based on today’s meeting).  Second, this process is far from over.  As mentioned above, the United States and Mexico are racing against a political deadline (when President Nieto leaves office November 30th), but that is not the only political consideration.  The U.S. political process/deadlines will also come into play, as mentioned in our previous updates.  It is not clear whether a renegotiated agreement can be finalized and ratified in the time available.  Nevertheless, all companies will meaningful NAFTA-related investment should be considering how today’s announcement is likely to impact their business and begin planning accordingly. 

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

Best regards,
Ted

 

Section 301 – Latest Update

Dear Friends,

Just a quick update on Section 301, and the process surrounding List 3, in particular. 

As you know, the U.S. Trade Representative is considering whether to impose an additional 25% duty on a list of tariff provisions that represent $200 billion worth of imports from China (this is ‘List 3’).  The Section 301 Interagency Committee will be holding a public hearing on the scope of List 3 beginning this week.  The USTR will hear testimony from approximately 350 interested parties over 6 days.  The hearing schedule and the list of parties testifying are attached here for your reference.

In addition, we wanted to let you know that, as of last Thursday, the USTR had received 386 product exclusion requests under List 1.  The oldest request was filed on July 16, 2018.  So far, none of the 386 product exclusion requests have been acted upon.  A list of the exclusion requests is attached for your reference.  The USTR is expected to publish a notice in the Federal Register opening the exclusion process for List 2 shortly.  A similar notice (presumably) will be published for List 3 shortly after that list is finalized (expected in mid-to-late September).  Remember, it is better to file your exclusion request as early in the process as possible (it is going to be a long line!).

Finally, there will be a meeting in Washington between Chinese and U.S. officials later this week. This meeting is billed as being between “mid-level” officials on both sides (so, it is likely a meeting about whether it makes sense to keep meeting).  While this is a positive sign, it does not mean that the end is near (by any stretch).  For one reason, the U.S. delegation is being lead by a Treasury Department official.  The trade agenda (at least when it comes to China) is being driven by the White House, Commerce Department and USTR (not by Treasury).  As a result, no major breakthroughs are expected at this meeting.  That said, it is also being reported that there could be a possible meeting between President Trump and President Xi at one of the international meetings both will be attending in November.  While a resolution may not seem likely, President Trump has demonstrated a certain penchant for ‘declaring victory’ after in-person meetings with world leaders (and leaving the details to be worked out by others later – e.g., the Singapore summit with North Korea, the White House meeting with EU Commission President Juncker last month).  Nothing would surprise me at this point.

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

Best regards,
Ted

Trade Update

Dear Friends,

There has been a lot going on with international trade in recent weeks and we wanted to flag for you a couple of items you may have missed.

The first involves the NAFTA renegotiation.  Rather than engage in discussions involving all three countries at once, the U.S. has focused its efforts on first reaching agreement with Mexico.  U.S. and Mexican officials have been in discussions over the past several weeks and talks are expected to continue this week.  The talks re-started following the Mexican presidential election in July.  This effort seeks to conclude a deal in August, so that the current Mexican president (President Enrique Pena Nieto) can sign the revised deal before he leaves office November 30th (thereby allowing the new president, President-Elect Andres Manuel Lopez Obrador to focus on domestic issues). 

It appears that these bilateral talks are making progress, including on providing an exemption to the Automotive Section 232 investigation for existing Mexican auto plants (it is being reported that the U.S. is not willing to extend that exemption to future/new auto production in Mexico, to make sure that there is an incentive for companies to put new production in the United States).  That said, tough issues remain (e.g., a sunset clause, investor state dispute mechanisms, etc.).  In addition, Canada has not been included in these most recent discussions.  It appears that the U.S. and Mexico are intending to present Canada with a renegotiated agreement and a ‘take it or leave’ offer.  It is not clear how Canada will respond, if such an offer is made.  It should be an interesting couple of weeks.

The second involves the Steel and Aluminum Section 232 investigations.  While these are purportedly ‘national security’ investigations, President Trump announced last week that the U.S. would double the duties imposed on Turkish steel and aluminum imports (from 25% and 10% to 50% and 20%, respectively).  The U.S. Trade Representative also announced that it was reviewing Turkey’s continued eligibility under the Generalized System of Preferences program.   These efforts appear to be in response to Turkey detaining a U.S. citizen who is alleged to be involved in the July 2016 coup attempt. 

These developments show that President Trump is willing to use U.S. trade policy to influence other countries’ positions on unrelated issues.  While that may undercut the legal basis for some of these trade actions (e.g., is doubling the steel duties on imports from Turkey really related to U.S. national security concerns, or is it more of an effort to get Turkey to release Pastor Brunson?  Is the Automotive Section 232 investigation about U.S. national security, or about getting Mexico, Canada, the EU, Japan, Korea, etc. to change their policies on other issues?), and be a different way of doing things than previous administrations, it may be working (at least in the short term; in the longer term, this approach will likely come back to bite us in several different ways).

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

Best regards,
Ted

Section 301 — US Finalizes List 2

Dear Friends,

The U.S. Trade Representative issued a press release announcing the imposition of an 25% duty on a finalized ‘List 2’ yesterday (as you will recall, List 2 is the $16 billion worth of Chinese imports published on June 18, 2018) .  The finalized list contains 279 of the 284 HTS subheadings originally proposed to be covered.  The duties will be imposed on covered articles beginning on August 23, 2018.  The press release states that a notice will be published in the Federal Register shortly and that notice will include details on how interested parties can file a product exclusion petition.  A copy of the press release is attached here together with the finalized List 2.

The recent escalation of trade tensions (e.g., the finalization of List 2, China’s likely retaliation, President Trump increasing the List 3 duties from 10% to 25%, China announcing its intention to impose additional duties on a further $60 billion worth of U.S. imports in response, etc.), and the lack of meaningful negotiations to date, suggests that the duties (on both sides) will be around for awhile.  As a result, all companies that import from China should be reviewing their sourcing options and devising short, medium and long terms pans for coping (e.g., possibility of moving certain production steps out of China in the short term, while longer term options are explored, etc.).  These plans should include continuing to participate in the administrative process (e.g., filing product exclusion petitions, submitting comments/providing testimony on the impact of List 3 – and any subsequent lists, etc.), as well as Congressional outreach.  We are assisting numerous clients with these efforts and would be happy to discuss the options with you further.  If that would be helpful, just let us know. 

Best regards,
Ted

 

Section 301 – US Imposes Duties on $200 Billion Worth of Chinese Imports

Dear Friends,

The Trump Administration announced earlier today that the U.S. is beginning the process to impose an additional 10% duty on a further $200 billion worth of Chinese imports

As you may recall, when the Administration announced its intent to impose duties on $50 billion worth of Chinese imports, the Chinese government announced an intent to retaliate on a comparable value of U.S. imports.  At that time, President Trump announced that if China retaliated on U.S. imports, the United States would impose an additional duty on a further $200 billion worth of Chinese imports (see our June 19th update).

The U.S. imposed an additional 25% duty on a first round of products worth $34 billion on July 6th and China imposed an additional 25% duty on a first round of products also worth $34 billion that same day.  Both countries are also considering imposing additional duty on an additional $16 billion worth of merchandise.

In response to China’s retaliation, the U.S. Trade Representative issued a press release and advance copy of a Federal Register notice this afternoon.  The notice states that the U.S. is considering imposing an additional 10% duty on $200 billion worth of Chinese imports.  Before doing so, the USTR will accept public comments and testimony at a hearing.  The notice includes the schedule, as well as the list of the 6,031 tariff subheadings covered by the $200 billion. In coming up with the list of covered HTS provisions, the notice provides as follows:

“In developing the list of tariff subheadings included in this proposed supplemental action, trade analysts considered products from across all sectors of the Chinese economy. The tariff subheadings considered by the analysts included subheadings that commenters suggested for inclusion in response to the April 6 notice. The selection process took account of likely impacts on U.S. consumers, and involved the removal of subheadings identified by analysts as likely to cause disruptions to the U.S. economy, as well as tariff lines subject to legal or administrative constraints.”

A copy of the press release and the notice are attached here for your reference:

It is clear that the U.S.-China trade war is real and that the Trump Administration is willing to accept meaningful U.S. casualties (i.e., harm to U.S. businesses with interests in China).  It is also clear that the range of imports impacted by the duties is growing (by necessity).

All companies that import articles from China should be developing short, medium, and long-term plans for coping with this trade war.  We are assisting numerous clients with this and would be happy to discuss options with you further.

Best regards,
Ted