The United States and China have signaled in recent news reports that they are making strides to reach a deal to resolve ongoing trade issues. Provided that no trade agreement is reached between the US and China before March 17, 2019, Congress is requiring that the Office of the United States Trade Representative (USTR) issue an exclusion process for products that are subject to the third round of tariffs issued pursuant to Section 301 of the Trade Act of 1974 ("Section 301 Tariffs"). As reported in our earlier alert, the third round of Section 301 Tariffs covers $200 billion worth of goods imported from China.
Following a report dated March 22, 2018, which concluded that China has misappropriated and continues to misappropriate US intellectual property, the Trump Administration issued the first of three rounds of Section 301 Tariffs. The first round of Section 301 tariffs, effective July 6, 2018, raised tariffs 25% on $34 billion worth of goods imported from China. The second round, effective on August 23, 2018, raised tariffs 25% on an additional $16 billion worth of goods. The third round, effective on September 24, 2018, raised tariffs 10% on $200 billion worth of goods. The tariff rate for goods covered by the third round of Section 301 Tariffs was scheduled to increase from 10% to 25% on January 1, 2019. However, on December 1, 2018, the US and China agreed to continue negotiating for at least 90 days during which time the Section 301 Tariff rate for the third round would remain at the 10% level until March 2, 2019. On February 24, 2019, citing "substantial progress" in trade talks, the President indicated that he would postpone increasing tariffs on the third round of goods and not raise tariffs to 25% on $200 billion worth of goods imported from China on March 2, 2019. Instead, tariff levels will remain at 10% beyond March 2, 2019.
Following the first and second rounds of Section 301 Tariffs, USTR published a process where interested parties could seek an exclusion from the additional duties. If granted, exclusions are valid for one year and apply retroactively to the effective date of the applicable Section 301 Tariff. As of February 14, 2019, USTR has granted approximately 960 exclusion requests for products covered by the first round of tariffs. USTR continues to review exclusion requests submitted in connection with the first round of tariffs and is concurrently reviewing exclusion requests submitted in connection with the second round of tariffs.
Despite the issuance of exclusion request processes for both the first and second round of Section 301 Tariffs, USTR did not issue an exclusion request process for the third round of tariffs due, reportedly, to the lower duty rate applicable to the third round (10% compared to the 25% applicable to the first and second rounds). In early January 2019, the USTR advised Congress that if the duty rate applicable to the third round of tariffs is raised to 25%, then USTR will initiate an exclusion process for products covered by the third round. On Friday, February 15, 2019, Congress made that commitment an explicit requirement regardless of whether the duty rate for the third round jumps to 25% or remains at 10%, in language included with the spending package passed by Congress to avert another partial government shutdown.
On February 15, the President signed the new spending package. In the joint explanatory statement for the spending package, which is available here, Congress requires that USTR create an exclusion process for products covered by the third round of Section 301 Tariffs within 30 days (i.e. no later than Sunday, March 17). The joint explanatory statement notes: "It is concerning that there is no exclusion process for goods subject to tariffs in round 3 of the Section 301 proceeding, as was done in the first two rounds. USTR shall establish an exclusion process for tariffs imposed on goods subject to Section 301 tariffs in round 3. This process should be initiated no later than 30 day after enactment of this Act, following the same procedures as those in rounds 1 and 2, allowing stakeholders to request that particular products classified within a tariff subheading subject to new round 3 tariffs be excluded from the Section 301 tariffs." Unless the US and China reach an agreement before March 17 to end the trade war, those affected by round three of the Section 301 Tariffs will soon be able to file exclusion requests.