Legislation funding the U.S. Government that was signed into law by President Trump on 15 February 2019 includes a provision requiring an exclusion process for articles subject to the third round of tariffs on Chinese products (List 3) imposed under Section 301 of the Trade Act of 1974 (Section 301). Until now, USTR has indicated that there would not be a product exclusion process for List 3 tariffs unless the tariffs were increased from 10 percent to 25 percent. As such, companies will now be able to request exclusions of products on List 3 subject to Section 301 tariffs.

Members of congress have been under increasing pressure from constituents with products on List 3 who have had to deal with associated higher costs for key imported products, parts, and components from China. Both Republican and Democratic members of congress have been vocal in expressing their unhappiness with the situation, and used the spending bill as an opportunity to require USTR to put an exclusion process into place.

The new procedures, which are intended to be identical to those adopted for product exclusions from earlier rounds of Section 301 duties, are scheduled to be implemented within 30 days after enactment (i.e., by 18 March 2019).

Background

At issue are 10 percent tariffs imposed since 24 September 2018, on an estimated USD$200 billion in imported goods from China. These tariffs have been levied to counter allegedly unfair or unreasonable Chinese acts, policies and practices related to technology transfer, intellectual property, and innovation. This action follows on two prior rounds of 25 percent tariffs already imposed the first went into effect on 6 July 2018, on an estimated USD$34 billion in imports from China, and the second went into effect on 23 August 2018, on another USD$16 billion in imports from China.

The 10 percent tariffs on these articles are currently scheduled to increase to 25 percent on 2 March 2019, absent an agreement being reached in the broader trade dispute between the United States and China. As of the date of this Alert, such negotiations were under way, but inconclusive.

Likely exclusion procedures

In both prior rounds of Section 301 tariffs, USTR established a process allowing stakeholders (including associations) to request that particular products classified within a tariff subheading subject to the tariffs be excluded. However, USTR announced that no such exclusion process would be adopted for the third round of 10 percent tariffs. Congress has now sought to rectify this situation by mandating the implementation of identical exclusion procedures for the third round of tariffs.

It is therefore anticipated that the new exclusion process will involve requests for one-year exclusions that will be evaluated on a case-by-case basis. In the prior exclusion procedures the granted exclusions applied retroactively to the starting date of the tariffs. It is not clear, however, what effective period is contemplated for exclusions form the third round.

USTR is already struggling under a major backlog of product exclusion requests for Lists 1 and 2, so the process for addressing List 3 requests could be protracted. In addition, the U.S. and China are engaged in intensive negotiations in an effort to reach an agreement that could lead to removal of some or all of the U.S. tariffs and Chinese retaliatory tariffs. If the negotiations fail, however, the List 3 tariffs are likely to increase to 25 percent on 2 March 2019.