The trade tensions between the United States and China intensified over the past week, after negotiations between the two governments to resolve their dispute over Chinese intellectual property and technology transfer policies stalled. Each side has blamed the other for allegedly backtracking on commitments and undermining the progress that had reportedly been made.

The U.S. government responded by increasing tariffs to 25 percent on the same $200 billion of imports of Chinese goods that had previously been subject to a 10 percent tariff increase. The U.S. government also requested comments on imposing a 25 percent tariff on an additional $300 billion worth of imports of Chinese goods. The newly announced or proposed tariffs, combined with earlier rounds of tariff increases imposed last year, would cover virtually all imports of Chinese goods. China responded by increasing tariffs to up to 25 percent on $60 billion a year of imports from the United States.

The Office of the U.S. Trade Representative (USTR) intends to establish a process for requesting product exclusions from the new 25 percent tariffs on $200 billion of imports of Chinese goods. Importers affected by the new tariffs should begin preparing now and closely monitor the opening of the period for submitting exclusion requests.

In the meantime, USTR has continued to process exclusion requests related to earlier rounds of tariffs. USTR has received almost 14,000 exclusion requests. It has granted approximately 14 percent of those earlier requests, denied 50 percent and is still processing the remainder. The granted exclusions are retroactive to the date when the increased tariffs were imposed and will continue for a period of one year after the exclusions were published.

Key points:

  • Origin of the dispute and legal authority for new tariffs: As reported in previous Sidley client alerts available here, the U.S.-China trade tensions arose out of U.S. allegations that China has failed to protect intellectual property, forced U.S. companies to transfer technology to China and taken other actions that harm U.S. innovation. Pursuant to authority granted under Section 301 of the Trade Act of 1974, USTR imposed a series of new tariffs on imports from China in the hope of bringing China to the negotiating table to resolve the U.S. concerns.
  • Status of exclusions from first two rounds of tariffs: In July and August of last year, USTR imposed a 25 percent tariff on $50 billion worth of imports from China. 
    • On May 14, 2019, USTR issued its fourth set of product exclusions from the first round of tariffs. The latest set of approved requests cover approximately 515 separate exclusion requests. The list is available here.
    • Although USTR has not made its approach explicit, it has accelerated its issuance of exclusions in recent weeks by focusing on products for which USTR received the highest number of requests from U.S. industry. This approach puts “sole” U.S. importers at a relative disadvantage at the front end, but as USTR makes all exclusions retroactive to July 6, 2018, and then effective for one year from publication, the later-issued exclusions will, in fact, last longer.
    • USTR has not yet granted any exclusion requests for the second round of tariffs.
  • Increase in third round tariffs and exclusion process: Since September 24, 2018, USTR has imposed a 10 percent tariff on $200 billion worth of Chinese-origin goods. Effective May 10, 2019, USTR increased the tariff on these goods to 25 percent. The announcement is available here. The tariff increase applies to products that enter the United States on or after May 10, 2019, but does not apply to goods that were exported from China prior to May 10, 2019, and enter the U.S. prior to June 1, 2019.
    • USTR intends to establish a process to allow interested parties to request exclusions from the third round of tariffs but has not yet done so.
    • If USTR follows the same approach it used with respect to the first two rounds of tariffs, USTR will ask interested parties requesting exclusions to explain (i) whether the product that is the subject of the exclusion request is only available from China, (ii) whether the imposition of additional duties on the product would cause severe economic harm to the requestor or other U.S. interests and (iii) whether the product is strategically important or related to “Made in China 2025” or other Chinese industrial programs. The requests must include “a comprehensive physical description of the product,” and a product-specific exclusion request will be considered administrable only if the product description enables U.S. Customs and Border Protection to consistently identify and correctly classify the covered product at time of entry.
    • As with the exclusions for the first two rounds of tariffs, the product exclusions for the third round of tariffs 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. 
  • Possible fourth round of tariffs: On May 10, 2019, USTR proposed to impose a 25 percent additional tariff on $300 billion worth of Chinese-origin goods under 3,805 full and partial tariff subheadings. The announcement is available here. USTR will hold a public hearing on this proposal on June 17. Requests to appear at this hearing are due by June 10. Written comments, including input on the specific tariff levels that should be imposed, the appropriate aggregate level of trade to be covered by additional duties and requests to exclude specific subheadings from the proposed tariff increase, are due June 17.  
  • Response from China: China has responded to the previous imposition of Section 301 tariffs by imposing similar tariffs on imports of U.S. goods. Following the imposition of the 10 percent tariff on $200 billion worth of Chinese-origin goods in September 2018, China responded by imposing its own tariffs of 5 percent to 10 percent on $60 billion a year of imports from the United States. On May 13, 2019, following the announcement from the U.S. government that the tariff on $200 billion worth of Chinese-origin goods would be increased to 25 percent, China announced its intention to impose additional tariffs on $60 billion worth of U.S. imports by up to 25 percent, effective June 1, 2019. China’s State Council Customs Tariff Commission further stated that China would establish a process by which interested persons could request exclusions from the Chinese tariffs on U.S. goods. The Commission will reportedly review and grant exclusion applications on a case-by-case basis.1  Any granted requests will be valid for one year from the date of the exclusion and will be retroactive to the date of the imposition of the increased tariff.