On October 4, 2021, U.S. Trade Representative Katherine Tai announced the restart of an exclusion process that could lead to the reinstatement of certain tariff exemptions imposed on Chinese imports under Section 301 of the Trade Act. 1974 (Article 301). Under the previous exclusion program, interested parties could apply to the Office of the United States Trade Representative (USTR) for an exclusion of Section 301 tariffs – which can be prohibitive, reaching up to 25% – on special products imported from China. In addition to the exclusions for products related to the fight against COVID-19, which are handled through a separate mechanism,1 all previously granted exclusions have expired.

In a notice dated October 8, 2021, the USTR announced it would restart the process by inviting the public to comment on whether to reinstate the expired exclusions it previously granted, and then extended, for 549. products. While the scope of the new process is more limited than some had hoped, many companies will welcome it.

Companies that have benefited from exclusions in the past and are on the 549 product list should consider submitting comments in support of reinstating these exclusions. Alternatively, companies may consider submitting comments opposing the reinstatement of certain exclusions that confer an advantage on competitors. Either way, companies should carefully monitor the exclusion process and related legislative developments.

Origin of tariffs and previous exclusion process

In 2018, the USTR imposed tariffs on Chinese imports following a Section 301 investigation. Based on this investigation, the USTR found that acts, policies and Chinese government practices related to technology transfer, intellectual property and innovation were unreasonable and discriminatory, and hampered or restricted US trade.2 The USTR then proceeded to impose tariffs in successive waves, based on a series of product lists.

An important element of this tariff program was the availability of an exclusion process. As part of this process, which was in effect from June 2018 to December 2020, interested parties could apply to the USTR to exempt certain products from Section 301 tariffs and, in some cases, comment on it. opportunity to extend these exclusions before they expire. Successful petitions resulted in product specific exclusions, based on a 10-digit HTS code and, in most cases, a technical description of the product. Once an exclusion was granted, all importers of the product, not just the importer who made the request, could benefit from the exclusion. The USTR has accepted public comment both for and against the exclusions and extensions.

The USTR assessed the requests on a case-by-case basis, taking into account the following four factors: (i) the availability of the product in question from non-Chinese sources; (ii) attempts by the importer to source the product from the United States or third countries; (iii) the extent to which the imposition of Section 301 tariffs on the particular product would cause serious economic harm to the importer or other US interests; and (iv) the strategic importance of the product for the Chinese government’s Made in China 2025 industrial policy or other Chinese industrial programs.

According to the most recent data available from the United States Government Accountability Office (GAO), of the 52,746 exclusion requests submitted to the USTR, 87% were refused, with the vast majority (69%) being refused for failing to not have demonstrated serious economic damage. Another 23% were turned down for failing to show that the product was only available in China, and the remaining 9% were turned down for other reasons. The USTR granted 13% of the requests, after which the excluded HTS codes and, in many cases, a technical description of the product were published in the Federal Register.

Since China’s Section 301 tariffs apply to a wide range of goods – currently four tariff schedules out of a total of $ 550 billion in imports – a wide range of sectors have benefited from the exclusions. . But some categories of goods seemed to have a better chance of getting exclusions than others. For example, while the USTR granted 19% of the 1,331 exclusion requests filed for plastic products, it granted only 10% of the 1,325 exclusion requests for chemicals. Other winners in the exclusion process included machinery, mechanical and electrical components, and healthcare products. Likewise, according to a GAO study, capital goods (that is to say., those used by businesses to produce goods and services) and some high-tech products were more likely to be excluded, with success rates of 24% and 27%, respectively.

Section 301 Exclusion Program, Version 2.0

The restarted version of this program has a more limited scope. At least at this point, the USTR has only solicited public comment on whether the 549 exclusions that were previously extended should be reinstated now that those extensions have expired. In a statement issued on October 5, 2021, the USTR explained that “the objective of the assessment will be whether, despite the first imposition of these additional duties in September 2018, the particular product remains available only in China.” The statement underscores the main rationale for the initial exclusion process, which was largely intended to give importers time to make supply chain adjustments away from China. In its request for comment on potential reinstatements, the USTR clarified that as part of the investigation to determine whether a product is only available in China, the USTR would consider:

  • whether the particular product and / or a comparable product is available from sources in the United States and / or third countries;
  • any change in the global supply chain since September 2018 with respect to the particular product or any other relevant industry development;
  • efforts, if any, that US importers or buyers have made since September 2018 to source product from the United States or third countries; and
  • domestic product production capacity in the United States.

In addition, the USTR has said it will review:

  • the likelihood of serious economic harm to the commentator or other US interests, including the impact on small businesses, employment, manufacturing, and critical supply chains in the United States; and
  • the overall impact of the exclusions on the objective of achieving the elimination of China’s acts, policies and practices covered by the Section 301 investigation.

These criteria are more detailed than previous iterations of the program and appear to create more flexibility for the USTR to develop a determination. In particular, the new program places particular emphasis on the potential impact of tariffs on the interests of small businesses. In addition, the new program could likely place less emphasis on the importance of proving serious economic damage, which accounted for 69% of releases under the previous program.

In some cases, under the previous exclusion program, comments submitted in opposition to a exclusion request played a significant role in the outcome, and we would expect the same to be true for the new one. process. For example, in 2018, Eccotemp Systems, which manufactures tankless water heaters in China and imports them to the United States, requested an exclusion on the grounds that its water heaters could not be made outside of China. After Eccotemp filed its application on the USTR public registry, a major Japanese water heater manufacturer, Rheem Manufacturing, submitted comments opposing Eccotemp’s application, arguing that Rheem had “a capacity aftermarket manufacturing and could supply all of the 40,625 units of tankless gas water heaters that Eccotemp reports imported from China in 2017. ”The USTR subsequently denied Eccotemp’s exclusion request.

Future developments

It remains to be seen whether the USTR will eventually expand the new exclusion process beyond the 549 products initially selected. In the meantime, companies should watch several key developments:

The 2021 trade law

The Commerce Act of 2021 (the Commerce Act) is an amendment that was inserted into the U.S. Innovation and Competition Act, which was passed by the Senate in June 2021. The Commerce Act would require a broader, consumer-focused Section 301 exclusion process than the recently announced USTR program. If the House passes the amendment, the Trade Act would directly reinstate all expired exclusions from Section 301. Additionally, for exclusions expiring on December 31, 2020, importers would be refunded all duties paid between that date and enactment. of the Law on Commerce. Finally, the Commerce Act would institute a new exclusion process using criteria such as whether tariffs would unreasonably increase consumer prices for everyday items consumed by low- and middle-income families, and whether the the article or a substitute is “commercially available” to the applicant.

New investigations under section 301

In September 2021, it was widely reported that the Biden administration was considering opening a new Section 301 investigation focused on China’s use of industrial subsidies. Such an investigation could result in the imposition of additional tariffs on Chinese imports. Depending on the scope and scale of the tariffs ultimately imposed, this could have a significant impact on supply chains, which are already burdened by existing Section 301 tariffs.

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1 As of March 5, 2020, the USTR issued tariff exclusions on certain medical products from China in connection with the US response to COVID-19, in consultation with the Department of Health and Human Services. After granting 200 initial product exclusions consisting primarily of personal protective equipment, the USTR initiated a public consultation process for additional exclusions on March 25, 2020. As a result of this public consultation process, the USTR has announced additional extensions and exclusions on December 29, 2020. After some exclusions expired, the USTR reopened the public comment process on the potential extension for 99 products and subsequently announced a provisional 45-day extension to take effect. consider public comments. The provisional extension is valid until November 14, 2021.

2 Notice of Decision and Request for Public Comment on Proposed Ruling Regarding Section 301 Action, 83 Fed. Reg. 14,906 (April 6, 2018).

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