Important US Customs Ruling on Determining Country of Origin for Section 301 Purposes

Dear Friends,

U.S. Customs and Border Protection recently published a ruling that every company considering shifting production from China to Mexico (or Canada) as part of a strategy to mitigate the impact of the Section 301 duties should be aware of.  In Headquarters Ruling H300226, CBP concluded that, while the NAFTA Marking Rules (19 C.F.R. Part 102) are used to determine the country of origin of articles imported into the United States from Mexico for marking purposes, the traditional substantial transformation test is used to determine the country of origin of articles for Section 301 duty purposes.  A copy of the ruling is attached here for your reference: H300226.

As you will see from the ruling, parts of a motor were imported into Mexico for assembly.  The assembly operation in Mexico was sufficient to satisfy the applicable NAFTA Marking Rule, such that the finished article was considered to a “product of Mexico” for marking purposes.  CBP, however, then went on to say that the traditional substantial transformation test is used for purposes of “antidumping, countervailing, or other safeguard measures[.]”  CBP then applied the traditional substantial transformation test to the facts and concluded that the Mexican assembly operations were not sufficient to confer origin and, therefore, the finished motor imported into the United States was a “product of China” for Section 301 purposes.  So, in short, the product had to be marked to indicate that it was of Mexican origin, but the importer had to pay the Section 301 duty applicable to Chinese-origin articles.

This ruling highlights a few important points.  First, while the traditional substantial transformation test and the NAFTA Marking Rules are meant to embody the same origin principles, they do not always produce the same result due to the different nature of the tests (i.e., the traditional substantial transformation test is subjective; whereas the NAFTA Marking Rules are objective).  Second, for purposes of section 301, the traditional substantial transformation test must be used even if the goods are imported from an FTA-partner country (e.g., Mexico, Canada, Singapore, etc.).  The NAFTA Marking Rules may be helpful to that analysis, but are not determinative.  Finally, CBP is willing to live with this seemingly absurd result (i.e., an article marked “Product of Mexico” being subject to duties applicable to “products of China”).

I hope that this helps.  If you have any questions about these issues, please let us know.

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

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

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

Miscellaneous Tariff Bill — One Step Closer to Reality

Dear Friends,

In a bit of good trade news, late last week, the Senate passed a slightly modified version of the Miscellaneous Tariff Bill Act of 2018 that had passed the House back in January 2018.  The bill authorizes temporary duty suspensions or reductions for hundreds products (the duty suspensions/reductions are generally effective for 2 years).  The bill also contains a provision extending certain customs user fees. 

The Senate version strikes a small number of products included in the House version, and modifies a handful of others.  As a result, the two versions of the bill will now need to be reconciled (given the small number of changes made by the Senate, the House will likely just vote on/pass the Senate version).  If this occurs, then it appears that the MTB will be sent to the President for signature as a stand-alone bill (rather than waiting to include it as part of a larger trade bill).  Given the concerns some in Congress have raised regarding the President’s recent trade policies – e.g., the handling of the ZTE enforcement case, the processing of Section 232 product exclusion petitions, etc., MTB’s best shot is probably as a stand-alone bill, rather than waiting to be included as part of a larger trade bill, as has been done traditionally.  It will also be interesting to see whether the President is inclined to sign such a bill.  While MTB is generally viewed as providing a limited benefit to U.S. manufacturers (the MTB’s intent is to provide a tariff break to manufacturing inputs that are not available domestically), the President has indicated in the past that MTB primarily benefits Chinese exporters.   

It is important to note that the MTB, if enacted, only impacts the Column 1, General rates of duty for covered articles (i.e., the Most Favored Nation/Normal Trade Relations rates).  The MTB does not change or otherwise impact Section 232 or Section 301 duties; those still apply.

All companies should review the list of products included in the MTB.  The provisions are not (supposed to be) company-specific.  Stated differently, any company that imports an article covered by a MTB description can claim the duty benefit (even if you were not the proponent of the provision).  Also, it is worth mentioning that the process of requesting MTB benefits will re-open in about a year (by October 15, 2019), so it is not too early to start preparing to participate in that process.

We hope this is helpful.  We helped numerous companies get their articles included in the MTB and would be happy to discuss this with you further.  If you have any questions, please 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

Section 301 – Product Exclusion Process

Dear Friends,

The U.S. Trade Representative issued a press release this afternoon that includes details on the process for seeking product-based exclusions from the additional duties being imposed on Chinese-origin articles under Section 301 (the first round of those duties went into effect earlier today).  An advance copy of the Federal Register notice containing the specifics for this process is attached for your reference.

 In summary, the product-based exclusion process is as follows:

* all requests to exclude a particular product must be filed by October 9, 2018 (90 days from today);

* there is an opportunity to file comments on such requests, and then for the requester to respond;

* if an exclusion request is granted, it will be effective back to July 6, 2018 (the effective date of this round of additional duties) and will be valid for one year from the date the exclusion approval is published in the Federal Register;

* exclusion requests should cover a “particular product” (this is broader than a just a part number and cannot be based on company-specific characteristics);

* exclusion requests may be filed by “interested persons, including trade associations” (which also suggests that the term “particular product” is meant to be interpreted broadly);

* each request must provide the rationale for the exclusion and, at a minimum, address (1) whether the particular product is available only from China, (2) whether the imposition of additional duties on this product will cause “severe economic harm” to the requestor or to other U.S. interests, and (3) whether the particular product is strategically important or related to China’s industrial policies, including “Made in China 2025”; and

* USTR will evaluate each request individually and take into account “whether the exclusion would undermine the objective of the Section 301 investigation”.

In terms of administering any approvals at the border, the notice also states that requestors may provide information on how U.S. Customs and Border Protection can administer the exclusion (i.e., how will CBP be able to differentiate between products covered by the exclusion and products not covered by the exclusion?).  Interestingly, the USTR’s press release makes it clear that one need not apply in order to benefit from an approval – i.e., approvals are product-specific, not company-specific (“Because exclusions will be made on a product basis, a particular exclusion will apply to all imports of the product, regardless of whether the importer filed a request. The U.S. Customs and Border Protection will apply the tariff exclusions based on the product.”).

The good news here is that (i) there is a product exclusion process (which should help address the impact the Section 301 duties are having on U.S. companies), (ii) petitions can be filed on a “product” basis, rather than on a single sku or part number basis, like with the Section 232 exclusion process, (iii) approvals will be retroactive to when the additional duties first went into effect (although it will be important to keep an eye on liquidation dates to be safe), and (iv) the USTR provided guidance on the factors that will be considered when reviewing requests.

The bad news is that there is no stated timeline for how long it will take the USTR to review and process exclusion requests.  Undoubtedly, the USTR is hoping that by broadening the scope of the petitions and the approvals to “particular products” it will result in fewer petitions being filed than have been filed at Commerce in the steel and aluminum Section 232 cases (i.e., more than 20,000 exclusion petitions filed and only 98 acted on in 3+ months = 51 years of processing time . . . .).  We believe that hope is misplaced and that the USTR will likely receive thousands of exclusion requests. 

Accordingly, it is important that any company impacted by the Section 301 duties, and considering filing a product exclusion petition, do so quickly.  We are assisting numerous clients with this process (which began before today) and would be happy to discuss with you how best to approach this effort now that we have these additional details.

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

Best regards,
Ted

Section 301 – Escalation

Dear Friends,

Last night, the President issued a statement advising that the United States would impose a 10% duty on an additional $200 billion in imports from China, if China goes ahead with its plans to impose retaliatory duties on U.S. importsA copy of the President’s statement is attached for your reference.

In this latest round of escalating rhetoric, the President directed the U.S. Trade Representative to identify an additional $200 billion in imports from China (this is in addition to the first list of approx. $34 billion and the second list of approx. $16 billion) to hit with an additional 10% duty, if China goes ahead and imposes its proposed retaliatory duties on July 6th.  If China retaliates to this measure, then the United States will seek to impose duties on another $200 billion worth of imports from China.

The President is attempting to show China that he is serious about the forced technology transfer issue and about using duties to get China to change its behavior.  He is also demonstrating that he intends to use the U.S. trade deficit with China in his favor.  Since the U.S. imports far more from China (approx. $505 billion), than China imports from the United States (approx. $130 billion), President Trump appears to believe that he has the ability to raise the stakes beyond what China can afford (i.e., the U.S. is threatening to impose additional duties on $450 of the $505 billion worth of imports from China; China can only retaliate up to the $130 billion worth of imports from the United States).  Given the complexity of the relationship, it is not clear whether this is in fact the case (e.g., China has said it is ready for a trade war and could take action other than increasing customs duties).

What is clear, is that the imposition of additional duties is having a meaningful negative impact on many U.S. companies.  If duties are imposed on an additional $200 billion (or $400 billion) worth of imports from China, then more companies in more industries will be impacted (e.g., it is hard to imagine that the Administration will be able to avoid consumer products, as they have largely done to date, with the next list of $200 billion).  While there is still time for the two countries to reach a negotiated settlement and avoid a trade war (the first tranche of duties does not go into effect until July 6th), that does not appear likely, at this point.  As a result, all companies that import from China should be reviewing their options.  In particular, companies that import from wholly foreign-owned enterprises (“WFOEs”) should consider joining our coalition of companies pursuing a categorical exemption from the additional duties.  We continue to be in discussions with different parts of the Administration and with members of Congress on a possible exemption for such imports.

We trust 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