U.S. Also May Further Disrupt Chinese Foreign Direct Investment in Sensitive U.S. Industries and Technologies

Earlier this week, the Office of the United States Trade Representative (“USTR”) proposed levying tariffs of 25 percent on a wide array of Chinese-origin goods in response to certain acts, policies, and practices of the Government of China relating to technology transfers, intellectual property, and innovation that the USTR deemed to be unreasonable or discriminatory and a burden to U.S. commerce. In addition, the President directed the Secretary of the Treasury to propose action intended to address concerns about investment in the United States directed or facilitated by the Government of China in certain sensitive industries or technologies. The proposed tariff and investment restriction actions followed the March 23, 2018, implementation of tariffs on imported steel and aluminum products in connection with a national security-related investigation undertaken by the Department of Commerce, as well as the implementation earlier this year of tariffs and other trade restrictive measures pertaining to imported solar cells and modules and washing machines.

Taken together, these actions, particularly when coupled with retaliatory measures taken by U.S. trading partners, primarily China, threaten to destabilize global trade, increase costs for those U.S. industries, including the oil and gas industries, that consume the imported items subject to higher tariffs, limit export opportunities for those U.S. industries, such as farming and ranching, that now are facing retaliatory tariffs, and ultimately raise prices for consumers.

The following describes the intellectual property- and national security-related investigations that have resulted in the recently-implemented tariff measures and proposals insofar as these have the greatest potential for disruption, and discusses potential alternative means for mitigating the adverse effects of the tariff measures.

Section 301 Investigation Relating to Technology Transfers, Intellectual Property, and Innovation

On August 18, 2017, the USTR, at the direction of the President, initiated an investigation under Section 301 of the Trade Act of 1974, as amended,1 to assess whether certain Chinese acts, policies, and practices may be unreasonable or discriminatory and may be harming American intellectual property rights, innovation, or technology development. During the course of its investigation, the USTR engaged in interagency consultations, held a public hearing, and considered comments from the public. The USTR published the resulting report to its website on March 22, 2018.2 This report coincided with the issuance of a Presidential Memorandum, 83 Fed. Reg. 13099 (Mar. 27, 2018),3 and the issuance of a USTR Fact Sheet4 pertaining to the Section 301 investigation.

The Presidential Memorandum concluded that:

  • China uses foreign ownership restrictions, including joint venture requirements, equity limitations, and other investment restrictions, to require or pressure technology transfers from U.S. companies to Chinese entities;
  • China imposes substantial restrictions on, and intervenes in, U.S. firms’ investments and activities, including through restrictions on technology licensing terms;
  • China directs and facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting edge technologies and intellectual property and to generate large-scale technology transfer in industries critical to Chinese industrial planning, including the Made in China 2025 initiative;5 and
  • China conducts and supports unauthorized intrusions into, and thefts from, U.S. computer networks.

In light of these findings, the President engineered a three-pronged response: (i) the proposed imposition of tariffs on approximately $50 billion dollars of annual imports of Chinese-origin goods based on estimated trade values for calendar year 2018; (ii) the initiation of World Trade Organization (“WTO”) dispute settlement proceedings relating to Chinese intellectual property licensing practices; and (iii) enhanced restrictions on Chinese foreign direct investment.

Proposed Tariff Measures. On April 3, 2018, the USTR released an unpublished Federal Register notice proposing the imposition of 25 percent ad valorem6tariffs on a wide array of Chinese-origin goods.7 The list of goods, which include vaccines, aluminum, iron, steel, engines, industrial machinery, electronics, motor vehicles, aircraft, vessels, spacecraft, and medical devices, was compiled by identifying those items that benefit from Chinese industrial policies, including the Made in China 2025 initiative, and then removing those items that would be too disruptive to the U.S. economy.8

These tariff measures, however, have yet to be implemented and might not be implemented for several months if at all. For the latter scenario to come to fruition, however, the Government of China likely would have to have made meaningful strides toward changing the behavior asserted by the United States to be unreasonable and discriminatory.

Prior to the implementation of tariffs, the USTR will consider written submissions, which are due by May 11, 2018, and conduct a public hearing on May 15, 2018.9 Rebuttal comments are due by May 22, 2018.10 The USTR specifically will be considering: (i) the specific products to be subject to increased duties, including whether the products listed in the Annex to the Federal Register notice should be retained or removed and whether products that are not currently listed should be added; (ii) the level of increase, if any, in the rate of duty; (iii) the appropriate aggregate level of trade to be covered by the additional duties; (iv) whether the imposition of tariffs would be an effective means of achieving the elimination of unreasonable or discriminatory Chinese practices; and (v) whether maintaining or imposing tariffs on a particular product would cause disproportionate economic harm to U.S. interests, including small- or medium-sized businesses and consumers.

Interested U.S. parties should carefully review the Annex to the Federal Register notice and evaluate whether to appear at the hearing and/or to submit comments to the USTR. In addition, as has become the norm in these types of trade actions, engagement with Members of Congress, either directly or through Washington lobbyists, also should be contemplated, particularly given the specter of Chinese retaliation. Indeed, on April 4, 2018, the Government of China published a list of 106 U.S.-origin goods that could face retaliatory tariffs of 25 percent. This list, which includes certain aircraft and soybeans, was developed to inflict pain primarily on those states that supported the President in the 2016 election.11 In addition, the Government of China requested WTO consultations with the United States. In response, on Thursday, April 5, 2018, the President threatened to impose an additional $100 billion in tariffs on Chinese-origin goods in response to China’s “unfair retaliation.”

WTO Dispute Settlement. On March 23, 2018, the United States initiated WTO dispute settlement proceedings pertaining to alleged discrimination in intellectual property licensing by requesting consultations with the Government of China pursuant to the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.12 Typically, the WTO dispute settlement process takes several years to resolve.

Restrictions on Chinese Foreign Direct Investment. While Chinese investment in the United States already may be subject to review by the interagency Committee on Foreign Investment in the United States (“CFIUS”) and has increasingly come under scrutiny, including in connection with technology-driven transactions,13 the President has directed the Secretary of the Treasury to use any available statutory authority to address concerns regarding proposed Chinese investment in key U.S. industries and technologies, such as those identified in the report issued by the USTR: (i) aviation; (ii) integrated circuits; (iii) information technology and electronics; (iv) biotechnology; (v) industrial machinery and robotics; (vi) renewable energy; and (vii) automotive.14

While the Secretary of the Treasury could recommend enhancements to the CFIUS process that are consistent with its existing statutory authority, there has been speculation that the Secretary of the Treasury, who is required to issue a report to the President within 60 days of the date of the Presidential Memorandum (i.e., May 21, 2018), will take the unprecedented step of invoking the International Emergency Economic Powers Action (“IEEPA”), which currently authorizes the U.S. Export Administration Regulations, as well as certain of the embargoes and sanctions programs administered by the Office of Foreign Assets Control, U.S. Department of the Treasury. To do so, the President first must find that proposed Chinese investment in certain industry sectors or technologies presents an unusual and extraordinary threat to the national security, foreign policy, or economy of the United States. Having done that, the IEEPA could, for example, be used to erect a China-specific investment review process that is not bound by the strictures that currently govern the CFIUS review process, including by extending reviews to greenfield investments, joint ventures, and other forms of transactions that currently are not within CFIUS’ jurisdiction.

Section 232 Investigation Relating to the Effects on U.S. National Security of Steel and Aluminum Imports

While the tariff measures described above are proposed, on March 23, 2018, as detailed below, Customs and Border Patrol (“CBP”) began implementing tariffs in connection with an investigation undertaken by the U.S. Department of Commerce into the effects that imported steel and aluminum have on U.S. national security.

Specifically, on April 19, 2017, the Secretary of Commerce initiated an investigation under Section 232 of the Trade Expansion Act of 1962, as amended,15 to determine the effects on U.S. national security of steel imports. The Secretary of Commerce initiated a second Section 232 investigation to determine the effects on U.S. national security of aluminum imports on April 26, 2017.

Having taken into consideration public comments, as well as public hearing testimony, the Secretary of Commerce issued its reports on the national security implications of steel and aluminum imports on January 11, 2018 and January 17, 2018, respectively.16 In each case, the Secretary of Commerce determined that the quantities and circumstances of steel and aluminum imports “threaten to impair the national security” of the United States. Accordingly, the Secretary of Commerce recommended a range of potential remedies.

The President, however, is not bound by the statute to implement the remedies recommended by the Secretary of Commerce. Instead, as detailed below, the President opted simply for the imposition of ad valorem tariffs of 25 percent on certain imported steel products and 10 percent on certain imported aluminum products from all countries, except Canada and Mexico. See Proclamation 9705 (Mar. 8, 2018), 83 Fed. Reg. 11625 (Mar. 15, 2018) (Adjusting Imports of Steel into the United States); Proclamation 9704 (Mar. 8, 2018), 83 Fed. Reg. 11619 (Mar. 15, 2018) (Adjusting Imports of Aluminum into the United States).17 The tariff obligations for U.S. importers of subject steel and aluminum products took effect at 12:01 a.m. on Friday, March 23, 2018.

The President subsequently modified the scope of the remedial measures through additional proclamations. See Proclamation 9711 (Mar. 22, 2018), 83 Fed. Reg. 13361 (Mar. 28, 2018) (Adjusting Imports of Steel into the United States); Proclamation 9710 (Mar. 22, 2018), 83. Fed. Reg. 13355 (Mar. 28, 2018) (Adjusting Imports of Aluminum into the United States).18 Specifically, the President exempted additional countries, albeit temporarily.

Rationale for Imposition of Tariffs on Imported Steel and Aluminum. The relevant statute does not define the term “national security,” but does specify a number of factors for consideration during a Section 232 investigation, including: (i) the domestic production needed for projected national defense requirements; (ii) the importation of goods in terms of their quantities, availabilities, character, and use as those affect those industries engaged in the production of items for national defense requirements and the capacity of the United States to meet national security requirements; and (iii) the close relation of the economic welfare of the United States and national security. In conducting the Section 232 steel and aluminum investigations, however, the Secretary of Commerce adopted a broader reading of the term “national security” that included the general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements that are critical to the minimum operations of the economy and government.

In the case of imported steel, the President found that global excess capacity threatens the viability of domestic steel production and degrades the ability of the United States to meet national security production requirements in the event of a national emergency. Similarly, in the case of imported aluminum, the President found that global excess capacity risks the United States being almost wholly reliant on foreign producers and, therefore, susceptible to being unable to satisfy existing national security needs or to respond to a national security emergency.

Product Coverage and Implementation of Tariffs. To remedy the deleterious effects of imported steel and aluminum products on U.S. national security, the President proclaimed, and CBP has begun implementing, ad valorem tariffs19 of 25 percent on the steel products, which are to be classified within subheading 9903.80.01, Harmonized Tariff Schedule of the United States (“HTSUS”), described below, and 10 percent on the aluminum products, which are to be classified within subheading 9903.85.01, HTSUS, described below.

The affected steel products are as follows:

  • flat-rolled products provided for in headings 7208, 7209, 7210, 7211, 7212, 7225 or 7226;
  • bars and rods provided for in headings 7213, 7214, 7215, 7227, or 7228, angles, shapes and sections of 7216 (except subheadings 7216.61.00, 7216.69.00 or 7216.91.00); wire provided for in headings 7217 or 7229; sheet piling provided for in subheading 7301.10.00; rails provided for in subheading 7302.1 0; fish-plates and sole plates provided for in subheading 7302.40.00; and other products of iron or steel provided for in subheading 7302.90.00;
  • tubes, pipes and hollow profiles provided for in heading 7304 or 7306; tubes and pipes provided for in heading 7305;
  • ingots, other primary forms and semi-finished products provided for in heading 7206, 7207 or 7224; and
  • products of stainless steel provided for in heading 7218, 7219,7220, 7221, 7222 or 7223.

The affected aluminum products are as follows:

  • unwrought aluminum provided for in heading 7601;
  • bars, rods and profiles provided for in heading 7604; wire provided for in heading 7605;
  • plates, sheets and strip provided for in 7606; foil provided for in heading 7607;
  • tubes, pipes and tube or pipe fittings provided for in heading 7608 and 7609; and
  • castings and forgings of aluminum provided for in subheading 7616.99.51.

Please note that these tariffs are not time limited, but may, as discussed below, be impacted by domestic or international litigation.

Country Exemptions. As noted above, the President initially exempted Canada and Mexico from the imposition of tariffs, thereby arguably undercutting the purported national security rationale for the tariffs, but potentially creating a leverage point in the ongoing North American Free Trade Agreement (“NAFTA”) renegotiations. Subsequently, the President exempted Argentina, Australia, Brazil, the member countries of the European Union, and South Korea, which seemingly further divorced the tariffs from their stated national security purpose.20 However, these country-based exemptions expire on May 1, 2018, unless negotiations by then have resulted in the implementation of a satisfactory alternative means to remove the impairment to U.S. national security attributed to steel and aluminum imports.

For example, the United States and South Korea reportedly already have reached agreement on a permanent exemption from the 25 percent steel tariffs predicated on a cap on exports of South Korean steel to the United States at levels equal to 70 percent of the average export volumes between 2015 and 2017 (this translates to a quota of approximately 2.68 million tons of steel).21 In addition, South Korea also reportedly agreed to allow the United States to maintain a 25 percent tariff on South Korean truck imports for 20 additional years, or until 2041. South Korea also committed to increasing the number of U.S. automobiles to 50,000 from 25,000 it will allow into South Korea, even if the vehicles do not meet South Korean safety standards.

In addition to the countries identified above, the United States has signaled a willingness to enter into negotiations with other countries seeking exemptions. For example, South Africa reportedly has initiated a dialogue with the United States regarding its possible exemption. However, please note that the United States has threatened to implement quotas, like the one agreed with South Korea, to prevent import surges from exempted countries.

Product Exclusions. The United States also has established a protocol whereby individuals or organizations using any of the affected steel or aluminum products in business activities (e.g., construction, manufacturing, or supplying steel to end users) may request the exclusion of individual products. See 83 Fed. Reg. 12106 (Mar. 19, 2018).22 The requests, which are limited to 25 pages, inclusive of attachments, but exclusive of the forms made available on the website of the Bureau of Industry and Security, U.S. Department of Commerce (“BIS”), which are to be used in connection with any product exclusion request, will be publicly available and opponents will have the opportunity to submit objections within 30 days of the submission of a product exclusion request.

Each exclusion request must identify: (i) the tariff classification of the imported product; (ii) the quantity of the product required for a one-year exclusion; and (iii) a full description of properties and physical characteristics, including chemical composition, dimensions, strength, toughness, ductility, magnetic permeability, surface finish, and coatings. Objections to exclusion requests must include: (i) information regarding the products manufactured by the objector in the United States, including (a) the suitability of the product for the application described in the exclusion request, and (b) a full technical description of the properties of the product relative to the specifications provided in the exclusion request; (ii) the production capabilities at its U.S. production facilities; and (iii) the availability and delivery time for the product manufactured in the United States relative to the product for which an exclusion is requested.

Exclusions only will be granted if the article subject to the request is not produced in the United States in a sufficient and reasonably available amount, is not produced in the United States in a satisfactory quantity, or pursuant to specific national security considerations. Approved exclusions will be effective five business days after publication of the BIS determination for a one-year period. It is anticipated that the rejection of a product exclusion request will be appealable to the U.S. Court of International Trade.

Reactions from U.S. Trading Partners. U.S. trading partners have various international dispute mechanisms at their disposal, including pursuant to the NAFTA and the WTO Agreement on Safeguards.23 Indeed, on March 26, 2018, the Government of China requested consultations with the United States pursuant to the Agreement on Safeguards on the basis that the steel and aluminum tariffs are safeguard measures disguised as national security measures. This is a relevant distinction as the primary WTO agreement governing the imposition of tariffs incorporates a national security exception that has never meaningfully been adjudicated. Accordingly, there is some risk that if this case proceeds and results in a favorable determination for the United States other countries will be emboldened to take action on questionable national security grounds.

Finally, U.S. trading partners may take retaliatory action, whether or not strictly in compliance with applicable rules. For example, under NAFTA, Canada and Mexico are authorized immediately to retaliate in response to a safeguard measure, whereas under the WTO Agreement on Safeguards retaliatory action typically must be delayed for a period of three years. Nevertheless, effective April 2, 2018, the Government of China imposed tariffs of either 15 or 25 percent on imports of 128 U.S. products totaling approximately $3 billion of imports.24 The higher tariffs in particular were levied on products, such as U.S. pork, of strategic importance to certain U.S. states that helped elect the President. The European Union also has published a list of products that may be subject to retaliatory action, though it has not yet implemented additional tariffs.25