On April 3, 2018, the Office of the US Trade Representative (USTR) published a proposed list of products imported from China to target with an additional 25% tariff. These tariffs, which would cover $45-50 billion in Chinese exports, have been proposed in response to USTR’s findings in an investigation conducted under Section 301 of the Trade Act of 1974 (Section 301). In that investigation, USTR concluded that China engages in unreasonable and discriminatory practices — including the forced transfer of US technology to Chinese companies and the Chinese government and unfair conditions on IP licensing — that burden or restrict US commerce. The list of 1,333 articles targeted for additional duty primarily covers machinery, metals, electronics, and advanced medical products. USTR has established a process for interested parties to comment on the proposed list of products through written submissions and participation at a public hearing.

China responded swiftly to USTR’s proposed tariffs by immediately announcing plans to impose its own 25% tariff on a roughly equivalent amount of US exports to China, including politically sensitive products such as soybeans, aircraft and automobiles. If implemented, this would be the second wave of Chinese retaliation for recent US trade actions, as China has already imposed tariffs on more than 100 US agricultural and metal products in response to the Section 232 steel and aluminum tariffs imposed by the United States earlier this month.

Below, we discuss the USTR proposal and procedures through which parties can share their concerns about this proposed tariff and list of covered products. We then provide details of the Chinese response to the Section 301 tariffs and to other recent US trade actions. Last, we offer our thoughts on how companies can manage exposure to these tariffs and navigate today’s complex, tense, and rapidly changing trade environment.

The USTR Section 301 Tariff Proposal

The 25% tariff proposed in the USTR notice would cover specific products (identified by their number in the Harmonized Tariff Schedule of the United States (HTSUS)) in the following categories: chemicals, medicines, medical instruments and technologies, rubber, steel and aluminum, machinery (including engines, motors, batteries, turbines, and parts), electrical and audiovisual equipment, semiconductors, manufacturing equipment, and some military equipment and gun parts. The tariffs would apply in addition to normal customs duties, antidumping and countervailing duties, and other import charges currently imposed on these products.

Covered products were identified by USTR as “benefit[ting] from Chinese industrial policies, including Made in China 2025.” At the same time, USTR identified and removed products on which new tariffs would likely cause “disruptions to the US economy” or relatively significant harm to consumers. Products covered by the US Section 201 safeguards (solar products and washing machines) are not included in the USTR list, but there is considerable overlap between the coverage of the Section 232 steel and aluminum tariffs and these proposed measures. If these tariffs are implemented, some steel products from China would be subject to a combined tariff of 50% and some aluminum products would be subject to a combined duty of 35%.

Public Comment and Hearing Procedures

USTR is soliciting public comments and will also hold a hearing for interested parties to express views on this tariff proposal. The timeline is as follows:

USTR invites interested parties to comment on “any aspect” of its proposal, including the tariff level, product coverage (including the removal or addition of certain products), and the total value of Chinese exports targeted. Per USTR’s notice, parties commenting on the coverage of particular products should explain whether tariffs “on a particular product would be practicable or effective to obtain the elimination” of the Chinese policies examined in the Section 301 investigation, and whether tariffs “on a particular product would cause disproportionate economic harm to US interests, including small- or medium-size businesses and consumers.” In addition, we are of the understanding that companies can use their comment submissions as a means to request exemptions from the proposed tariffs (other than this option, it appears that there will not be opportunities to seek company-specific exemptions).

With regard to consumer impact, the US government analysis underlying the USTR tariff proposal took into account “available trade data involving alternative country sources for each product.” In other words, USTR considers products with lower associated consumer impacts to be those that could feasibly be sourced from elsewhere if tariffs — and thus prices — increased on the Chinese products. This may also be relevant to companies trying to mitigate the impact of tariffs on their business. In addition to submitting comments to USTR and perhaps participating in the hearing, concerned companies would be wise to assess the extent to which planned purchases of subject Chinese items could be sourced domestically or from other countries.

The procedural timeline established by USTR suggests that any tariffs would not be imposed before the end of May or early June. Before that time, USTR will review comments received and could modify the list of proposed products accordingly. The comment period also provides the administration with time for bilateral trade and investment discussions with China. US officials have implied that significant Chinese policy reforms and improved market access for US companies could lead the US to defer or eventually withdraw these tariffs.

Chinese Response to US Trade Actions

2. The full list of products (Section 301 retaliation) is available here (unofficially translated by the US-China Business Council).

3. See “China plans additional tariffs on 50-bln-dollar US products,” Xinhua, April 4, 2018, available at: http://english.china.com/news/business/56/20180404/1249801.html

On the day after the USTR announcement, China released its own list of US imports on which an additional 25% tariff would be levied if the United States proceeded with its plan. This list covers an approximately equal value of US exports, around $50 billion, and includes some of the most significant and politically sensitive US exports to China —soybeans, corn, airplanes, beef, and whiskey. China may announce additional retaliatory trade sanctions in response to other US actions such as the Section 201 import measures on solar panels and washing machines.

In addition to announcing these tariffs, China also filed a WTO complaint concerning the US tariffs announced as a result of the Section 301 investigation. In its request for consultations, China has taken the position that 1) the proposed US tariffs violate US WTO commitments in and of themselves, and 2) the practices investigated in the Section 301 case are covered by WTO agreements, and therefore the US must litigate issues surrounding these practices at the WTO before responding to them. As we suggested in an earlier alert, whether or not the policies evaluated in the Section 301 investigation are covered by WTO agreements will be a central issue in this dispute.

Options for Concerned Companies

All of these recent developments should be of serious concern to companies engaged in significant trade with China.

US companies involved in importing products from China that are included in the general categories described above should carefully review the list of products issued by USTR to assess their potential exposure and analyze options for mitigation. If a key product is included on the USTR list, the most concrete action would be to submit public comments to USTR on the proposed tariffs and possibly register to participate in the USTR public hearing. As noted above, companies can request a changed tariff level, the addition or elimination of certain products, and might be able to request exemptions from the tariffs through their comment submissions. Companies should also ensure that their Congressional representatives are made aware of their concerns.

Companies involved in exporting to China should equally review the list of products on which the Chinese government has proposed additional tariffs. While the Chinese government has not announced a formal comment process, there may be ways in which the coverage of this list could be modified, or the burden reduced through appropriate communication with the Chinese government.

Finally, it is critical that companies with interests in this area remain abreast of US-China trade and investment policy developments, which are occurring with unprecedented speed. For example, yesterday’s announcement by President Trump that he has directed USTR to consider tariffs on yet another $100 billion in Chinese imports suggests that the current situation may not be resolved any time soon.