April 11, 2018

By John Scannapieco and Doreen Edelman

Following President Trump’s March announcement directing the Office of the U.S. Trade Representative (USTR) to implement tariffs on nearly $50 billion worth of Chinese imports, on April 3 the USTR published a proposed list of 1,333 Chinese products under consideration for 25 percent ad valorem tariffs.

The tariffs were one of three actions the administration requested in light of the USTR’s findings published in a March report detailing its determinations following a six-month Section 301 investigation into Chinese practices related to forced technology transfers and intellectual property theft. Section 301 of the Trade Act of 1974 provides the President and the USTR with broad authority to investigate and respond to discriminatory trade practices in foreign countries found to harm U.S. commerce. At the direction of the President, USTR also requested a consultation with China at the World Trade Organization (WTO) to address China’s discriminatory technology licensing requirements, and the Treasury Department is preparing options for the President to consider regarding restrictions on U.S. investments by Chinese companies.

U.S. Proposed Product List

The proposed list of over 1,300 Chinese products targeted with tariffs by the U.S. include key products and industries in the strategic sectors of President Xi Jinping’s “Made in China 2025” plan, such as semiconductors, electric vehicles, medical devices, aerospace products, and various new and emerging technologies in robotics and electronics. The majority of these products fall under Chapters 84 and 85 of the U.S. Harmonized Tariff Schedule for machinery, mechanical appliances and electrical machinery/products. There will be an opportunity to submit public comments on the proposed product list through May 11 and subsequently the Section 301 Committee will hold a public hearing on May 15. There will also be an opportunity to submit a rebuttal statement after the hearing that is due by May 22.

China’s Retaliatory Response

On April 4, the Chinese Ministry of Commerce announced its plans to impose a retaliatory 25 percent tariff on 106 U.S. products worth a similar $50 billion annually in response to the U.S. proposed Section 301 tariffs. The 106 products include key U.S. exports to China, including soybeans, small aircraft, whiskey, chemicals and certain vehicles. The U.S. is the second-largest soybean exporter in the world and soybeans are its top agricultural export to China. This would particularly affect farming regions of the U.S. that are considered to be President Trump’s base, and China could be deliberately seeking to make a political as well as an economic statement by threatening these particular tariffs. While no date was set for the 25 percent duties to formally come into effect, their actual implementation likely will depend on the final list issued by the USTR when it issues its determinations after the public comment, hearing, and review period. Ongoing negotiations between the two nations could certainly change the final outcome of the tariff implementation process.

Updates and Key Takeaways

The stakes continued to raise as the White House issued a response statement to the threat of Chinese tariffs on April 5, where President Trump stated “[i]n light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under Section 301, and, if so, to identify the products upon which to impose such tariffs.” This would be a significant escalation of a looming trade war, however, it is still too soon to assess the credibility of such a threat. Further, any such additional proposed tariffs would have to go through a similar public comment and hearing process. The President further directed the Secretary of Agriculture to implement a plan to protect U.S. farmers and agricultural interests, likely to ease concerns over the numerous agriculture products threatened by the Chinese response. The House Ways and Means Committee plans to hold a hearing April 12 to review the effect of the Section 301 tariffs.

On Tuesday, April 10, Xi Jinping promised in a speech in Beijing that he plans to significantly lower import tariffs on vehicle imports this year, in what were his first public remarks since the escalation of the tit-for-tat trade restriction measures threatened by both the U.S. and China. While China has made similar assurances in the past and it remains to be seen how credible the promise actually is, it could show a willingness to work towards a negotiated agreement on trade practices that ultimately benefits both sides.

A few key takeaways from the past two weeks of Section 301 updates:

  • Formal procedures for public comment and the public hearing have been published in the Federal Register and electronic submissions can be made at www.regulations.gov.
  • The actual imposition of the tariffs will not be formalized on either side for months to come, and the reality is that negotiations on both sides could dramatically reduce the amount of products actually impacted.
  • U.S. businesses should assess the potential impact any tariffs may have on their supply chains and customers, and whether existing commercial contracts provide opportunities to mitigate any adverse impact.
  • Businesses should consider including provisions in their commercial contracts, including a broad force majeure clause that specifically addresses the imposition of tariffs, an early termination provision, or a provision that permits an equitable price adjustment.

BD John ScannapiecoJohn M. Scannapieco is a shareholder and co-leader of the Global Business Team at Baker Donelson (Nashville). Scannapieco advises both U.S. and foreign-based companies on international business matters, counseling clients in matters including export compliance, foreign investment and global expansion. He serves as Honorary Consul from Great Britain and Northern Ireland in Tennessee and is a board member of the Tennessee-China Network.

BD Doreen EdelmanDoreen M. Edelman is a shareholder and co-leader of the Global Business Team at Baker Donelson (Washington, D.C.). With more than 25 years of experience in import and export compliance, foreign investment and global expansion, she advises both U.S. and foreign-based companies on international business matters.

For the previous article: https://industrytoday.com/article/section-301-escalates-trade-risks/