Section 301 Update — Increase in US Duties (and Increased Pressure on China)

Earlier today, in between tweets about yesterday’s Kentucky Derby result and the Mueller report, President Trump announced that (i) the 10% duty on articles included on List 3 would increase from 10% to 25% this coming Friday (May 10, 2019), and (ii) a 25% duty would be imposed on the remaining $325 billion worth of imports from China “shortly”. 

 This announcement is a bombshell, particularly given recent stories about all of the progress being made in the negotiations between the United States and China.  Secretary Mnuchin and USTR Lighthizer were in China last week, and Vice Premier Liu was expected to come to Washington, DC this week, to continue (and potentially complete) those negotiations.  We believe that today’s announcement should be viewed in that context – i.e., the negotiations may be down to the final stages and President Trump is using the leverage he has to cinch the deal.  In particular, people should watch to see if Vice Premier Liu still comes to Washington, DC this week for talks, or whether he stays home in response to today’s tweets.  If he does come to town, then there is a greater likelihood that a deal is reached (and the proposed increase in duties may mooted or delayed); whereas, if he stays home, then the proposed increase in duties take effect.

 Unfortunately, President Trump believes that the Section 301 duties are “mostly borne by China” and “have had little impact on product cost”.  As a result, all companies that import articles from China (whether currently subject to the Section 301 duties or not) should be watching the news this week for further developments.  Interesting times.

 If you have any questions, please let us know.

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(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 — Notice Delaying Duty Increase on List 3 from 10% to 25%

Dear Friends,

Further to the below, included here is an advance copy of a notice that will be published in the Federal Register next week officially delaying the increase in Section 301 duties on articles included on List 3 from 10% to 25%.  Based on the agreement reached by President Trump and President Xi last month (see previous post), the duty rate will now increase on such articles on March 2, 2019 (rather than on January 1, 2019) unless an overall agreement is reached, or there is a further delay.

Best regards,
Ted

 

 

Section 301 — Standstill Agreement Reached

Dear Friends,

Further to the below, the United States and China have agreed to adopt a standstill agreement in the on-going trade war to provide time for the two side to negotiate an overall resolution.  According to the White House press release:

On Trade, President Trump has agreed that on January 1, 2019, he will leave the tariffs on $200 billion worth of product at the 10% rate, and not raise it to 25% at this time. China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately.

President Trump and President Xi have agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. Both parties agree that they will endeavor to have this transaction completed within the next 90 days. If at the end of this period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%.

A copy of the press release can be found here.

This will certainly come as good news to many companies (in particular, those importing articles included on List 3).  The increase in the duty rate applicable to articles included on List 3 from 10% to 25% has been delayed from January 1, 2019 to March 1, 2019.  It is also reasonable to assume that the U.S. Trade Representative will not begin the process for imposing duties on the remaining $267 billion worth of imports until after March 1st, at the earliest. 

This announcement also suggests that President Trump views the dispute with China to be a ‘little picture’ trade dispute, rather than a ‘big picture’ geo-political battle with a rising power.  That is good news for companies with significant investment in U.S.-China trade, as the former is at least susceptible to a negotiated settlement; whereas the latter is almost certainly not.  That said, a great deal of work remains to be done if the two sides are to reach an agreement within 90 days on “structural changes with respect to [China’s policies regarding] forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.” 

While this may be a positive development, the outcome is still far from certain.  As a result, companies should continue to be looking at the various mitigation strategies.  If you have any questions about these strategies, or if you would otherwise like to discuss the situation further, please let us know.

Best regards,
Ted

CBP’s Section 301 Enforcement Push

Dear Friends,

As companies consider mitigation strategies to offset the impact of the Section 301 duties, we wanted to share an important update regarding enforcement priorities at the border.  Further to recent reports, CBP’s Office of Regulatory Audit has confirmed that it will be ramping up enforcement of “various types” of imported electronics (i.e., products classified in chapters 84 and 85 of the Harmonized Tariff Schedule of the United States).  In connection with these efforts, Regulatory Audit is adding staff, including managers and auditors.  For instance, CBP is adding 60 new auditors across Regulatory Audit’s 10 field offices.  Our contacts in Regulatory Audit have informed us that, as part of this effort, a first “wave” of CF-28s (Requests for Information) since the imposition of the Section 301 duties will be issued in 2-4 weeks.  

There are several reasons for CBP to focus its enforcement on imported electronics.  Most importantly, billions of dollars in revenue are at stake for the U.S. government, and CBP is intent on collecting that revenue (the Trump administration expects CBP to collect “record-setting revenues”).  Also, given that electronics have generally been entitled to be entered duty free (or subject to very low duty rates), CBP recognizes that importers are under pressure to reduce the Section 301 impact and, therefore, may (intentionally or unintentionally) act in a manner contrary to U.S. customs laws and regulations.  Last, targeting electronics is justifiable given the conclusions of the Section 301 investigation, namely that the Government of China engages in intellectual property theft and forced technology transfers to support its industrial advancement goals.  Stated differently, targeting electronics aligns with the legal basis for the Section 301 duties and the administration’s messaging around China’s unfair policies. 

While CBP has confirmed that an enforcement push will be made with respect to electronics, we understand that CBP is increasing enforcement activities on all fronts.  As such, companies pursuing Section 301 mitigation strategies should tread cautiously.  Re-classifying products, changing the country of origin, and/or decreasing the customs valuation (for example, by declaring the “first sale” price in a multi-tiered transaction, rather than the price the U.S. importer pays), is likely to draw scrutiny from CBP.  As such, it is important that companies be able to demonstrate that they exercised reasonable care in carrying out these activities (not exercising reasonable care can lead to steep penalties, in addition to owing unpaid duties).  To demonstrate that a company is exercising reasonable care, we recommend having on file contemporaneously drafted documentation that substantiates the legal basis for any changes (e.g., documentation explaining that, based on changes to the supply chain, the product is no longer Chinese origin, since it is now last substantially transformed origin somewhere else).  Further, any company that receives a CF-28 or CF-29 (Notice of Action) should escalate the matter to the company’s legal department before responding and/or engage outside trade counsel, if appropriate. 

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

Best regards,

Ted

Section 301 – Upping the Ante

Dear Friends,

The in-person meeting between President Trump and President Xi of China scheduled for the side-lines of the G20 Summit in Buenos Aires on November 20, 2018 is taking on heightened significance. 

In a television interview yesterday, President Trump said that he has tariffs on the remaining $267 billion worth of Chinese imports into the United States “ready to go” if the two sides cannot reach a deal.  He also said that, while he is confident that a deal could be made, he believes that “China is not ready”. 

While anything can happen, it is wise to take such political rhetoric seriously (but not literally).  Accordingly, all companies should prepare for the United States initiating the process for List 4 shortly after the November 20th meeting.  Based on the timeline followed in the previous rounds, the List 4 additional duties could go into effect by late January/early February 2019.

We hope this is helpful.  If you have any questions, or if you would like to discuss these issues further, 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