It has been a month since President Trump tweeted that US tariffs on Chinese imports would increase sharply and tensions between the two nations show no sign of abating. With talk of raising tariffs from 10% to 25%, and a new 25% tariff applicable to $325 billion-worth of previously untaxed Chinese goods, recent developments have sent shockwaves through the Lexology Trade and Customs Hub page. Amid accusations of “economic terrorism”, we sift through the fighting talk to determine what companies caught in the crossfire need to know now – and what they should keep watch for in the coming weeks and months.

What are Section 301 tariffs?

As Arent Fox LLP explains, Section 301 of the US Trade Act 1974 authorises the president to impose tariffs on imports to counter trade practices that the Office of the US Trade Representative (USTR) deems to “either conflict with a trade agreement or burden US commerce unjustifiably”. The United States has opted to impose such tariffs on three lists of Chinese imports, with a new list being developed:

  • Lists 1 and 2 comprise Chinese high-tech goods subject to a 25% duty rate.
  • List 3 comprises a further $200-billion worth of Chinese goods, which were originally subject to a 10% duty rate – now increased to 25%.
  • Newly drafted List 4 covers almost all other Chinese imports (worth an estimated $325 billion), which were previously untaxed but are now due to be subject to a 25% duty rate.

Recent timeline

  • Sunday 5 May – President Trump announces the increase in tariff rates for Chinese imports on Twitter.
  • Thursday 9 May – the USTR publishes notice that tariffs applied to List 3 goods exported to and entered into the United States after 10 May, as well as all List 3 goods entered into the United States on or after 1 June (irrespective of export date), will increase from 10% to 25%. The office also announces plans to establish a product exclusion process for List 3 goods.
  • Monday 13 May – the Chinese Ministry of Finance announces retaliatory tariffs ranging from 5% to 25% on $60 billion-worth of US imports, effective from 1 June. The USTR also publishes List 4, comprising $300 billion-worth of Chinese imports – including numerous goods that were previously removed during the consultation period for Lists 1, 2 and 3 – on which it proposes to impose a new 25% tariff.
  • Tuesday 14 May – the USTR releases a number of (mostly machinery-based) product exclusions from List 1 goods.
  • Tuesday 21 May – the USTR publishes a Federal Register notice requesting comments on the proposed exclusion process for List 3.
  • Saturday 1 June – the new tariff rates for both US and Chinese imports come into effect.
  • Monday 10 June – affected companies must submit their request to appear at the public hearing regarding List 4 goods.
  • Monday 17 June – affected companies must submit their written comments for the public hearing on List 4 goods, due to take place on this date.

(For further details, see Venable LLP’s breakdown.)

What next for affected companies?

List 3 Chinese imports Barnes & Thornburg LLP warns that the rate increase to List 3 goods “will have a massive effect on almost all industries that rely on imports from China, including agriculture, automotive, electronics, textiles, and energy, just to name a few”.

Although no formal exclusion process has been put in place for these goods, the USTR has published a Federal Register notice requesting comments on a draft form that could be used to submit exclusion requests. Cozen O’Connor explains that the relevant factors for such requests include:

  • whether the product is produced in any country other than China;
  • whether the additional duty will result in severe economic harm; and
  • whether the product is of strategic importance or relates to the “Made in China 2025” programme.

Moreover, Sidley Austin LLP notes that – as with the exclusion process for Lists 1 and 2 – successful requests are not expected to be importer specific: “That is, any product meeting the appropriate harmonized tariff code or product description, as applicable, may benefit from the exclusion from the Section 301 tariffs.”

However, while the draft request form is similar to the one used in the exclusion process for Lists 1 and 2, Drinker Biddle & Reath LLP cautions applicants that this time around, it requires significantly more information. In particular, the USTR will not consider requests that identify more than one unique product. Speaking to a USTR official, the firm was told that the product description should be as detailed as possible and must be administrable for US Customs and Border Protection.

In addition, Arent Fox LLP urges companies to “be strategic” when deciding whether to submit a request at all, “as there are several factors to be considered apart from the data required”. Indeed, the firm notes that as of 17 May, only 18% of the 10,834 exclusion requests submitted in relation to List 1 and 0% of the 2,920 exclusion requests submitted in relation to List 2 had been granted – with 55% and 33% denied, respectively.

List 4 Chinese imports The breadth of List 4 indicates that almost all Chinese products imported into the United States may soon be subject to the additional 25% duty. Jones Day explains that the preliminary list includes 3,805 sub-headings – some of which were originally included in Lists 1 to 3, before being removed during the exclusion process. These cover “essentially all” Chinese imports, with the exception of “pharmaceuticals, certain pharmaceutical inputs, select medical goods, rare earth materials, and critical minerals”. Kelley Drye & Warren LLP elaborates, stating that the proposal covers everything “from food and agriculture to books and electronics to clothing and footwear”; Mayer Brown reiterates this, identifying consumer items such as smartphones, computers and textiles, and industrial products such as iron and steel pipes among the newly targeted items.

A public hearing on the effects of List 4 is due to be held later this month, and Baker & Hostetler LLP reports that “the USTR specifically requests that commenters address whether imposing increased duties on a specific product would be practicable or effective to eliminate China’s acts, policies and practices and whether doing so would cause disproportionate economic harm to US interests, including small or medium-size businesses and consumers”. As such, companies whose products appear on the list should consider filing public comments to the USTR or participating in the upcoming hearing. Steptoe & Johnson LLP proceeds to suggest that affected companies also “consider taking steps to ensure that officials at USTR and the White House are aware of their concerns” and may want to “urge their congressional representatives to weigh in with the Administration on their behalf”.

However, Covington & Burling LLP takes a slightly more relaxed view. Although it recommends that companies with interests in US-China trade relations move quickly to assess the potential impact of the new tariffs, it also suggests that they “closely monitor developments in bilateral trade talks, which might affect the timing and scope of final [Level 4] tariffs… and whether they will be implemented at all”.

Jones Day goes on to advise companies which are unsuccessful in having their products removed from List 4 to consider other options to reduce the impact of Section 301 tariffs on their business, including “monitoring whether USTR creates a product exclusion process for List 4 and, if so, filing product exclusion requests”.

Annexed US imports The Chinese government has responded to the US hikes by announcing that the tariff rates for $60 billion-worth of US imports will now apply as follows:

  • Tariffs for 2,493 “Annex I” goods will increase from 10% to 25%.
  • Tariffs for 1,078 “Annex II” goods will increase from 10% to 20%.
  • Tariffs for 974 “Annex III” goods will increase from 5% to 10%.
  • Tariffs for 595 “Annex IV” goods will remain at 5%.

(For a thorough breakdown of these goods, see Mayer Brown’s update).

Greenspoon Marder LLP explains that, in general, all four annexes appear to mirror those published by the government in September 2018, “with the exception of Annex IV, which no longer includes 67 lines of auto parts that was removed in December following the summit between Presidents’ Xi and Trump”. The firm goes on to predict that the new rates will have a particularly significant effect on the US wine industry, where tariffs have already increased from 14% to 53% in the past two years and where exporters face an additional 37% tax. Given that these fees led to a 25% decrease in US wine exports to China between 2017 and 2018, adding the latest tariff increase to the mix is likely to lead to a further decrease in activity.

The new rates are also likely to have a knock-on effect in the liquefied natural gas (LNG) industry. According to Sidley Austin LLP, the 10% to 25% increase on LNG exported from the United States (the third largest LNG exporter in the world) to China (the largest LNG importer in the world) could reduce product off-take and equity investments from Chinese entities, thereby slowing overall growth in the market.

Even more alarmingly, Squire Patton Boggs states that in China “influential (but so far nongovernmental) voices” have speculated that further retaliation could include a pause in the purchase of US agricultural and energy products, a reduction in the orders of Boeing products and/or restriction on the trade of US services.

Nevertheless, White & Case LLP reports that a second notice published by the State Council Tariff Commission introduces a product exclusion procedure for Chinese companies that import, produce or use products covered by the additional tariffs. Under the procedure, companies will be able to apply for one-year exclusions, which the SCTC will examine on the basis of:

  • the difficulty in searching for alternative sources;
  • the injury caused by the additional tariff to the economy of the applicant; and
  • the broader negative effects of the additional tariff on the relevant industry or on society.

Moreover, Wilmer Cutler Pickering Hale and Dorr LLP confirms that Chinese subsidiaries of foreign companies will also be eligible to apply for product exclusions. The deadlines to do so are currently set at 3-5 June for tariffs imposed in response to the US announcements concerning Lists 1 and 2, and 2 September-18 October for those imposed in response to the tariff increase on List 3.

Reassessing supply chains

Steptoe & Johnson LLP advises concerned companies to assess their exposure to “additional friction” in the US-China relationship and follow developments carefully: “As is evident from the most recent tariff increases and retaliation announcements, the state of play between China and the US is highly fluid and is expected to remain so even in the event an agreement is reached.” As such, companies may need to re-evaluate supply chains that run through either jurisdiction and consider adjusting their commercial activities.

Similarly, Duane Morris LLP recommends that affected parties pay close attention to any policy changes and further developments in both countries. In addition, the firm states that companies should “identify vulnerabilities in their current supply chains to avoid potential disruptions from their customers and distributors, and map out a strategy to deal with the possibility that the tariffs may linger”. This may include:

  • rethinking the supply chain and developing relationships with foreign producers that are located closer to the end-use markets;
  • familiarising themselves with the country of origin rule and consulting with trade advisers to determine whether a product that they intend to manufacture or purchase in a third country is of US or Chinese origin, and whether it would be subject to additional tariffs – if so, it may worth shifting operations away from this country;
  • utilising the first sale rule (where applicable), under which importers pay duty only on the price that a vendor pays, meaning that the dutiable value could be significantly lower, leading to a lower overall duty bill for products subject to Section 301 tariffs;
  • using a bonded warehouse or foreign-trade zone, in which goods can maintain their privileged foreign status even if they are manufactured into products that are subject to the additional tariffs; or
  • requesting duty drawback where their goods are imported into the United States but subsequently exported.

(For further details, see Baker & Hostetler LLP’s exposure and mitigation tactics).

Of course, these steps will not be practical for everyone, so the general consensus is to be on guard and to continue to monitor the situation closely. With various consultation deadlines fast approaching, affected parties should be weighing up the likely impact of the new tariffs on their business and submitting exclusion requests where possible. With the likelihood of exclusion slim, a full revision of the supply chain may be in order. In the meantime, companies with ties to both jurisdictions are sure to start feeling the pinch – and if the latest developments regarding US-Mexico tariffs are anything to go by, even companies that are not yet in the firing zone should be on high alert.