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Third Round of Section 301 Tariffs on China Go Into Effect, Without Tariff Exemptions – For Now

Posted September 26, 2018

Unlike with the first two rounds of punitive Section 301 levies which imposed a 25% tariff on $50 billion worth of Chinese imports, the Trump administration’s new 10% duty on another $200 billion imports from China that went into effect on Monday, does not include any provision for companies to seek exemptions from the new tax.

The final list of products subject to the 10% tariff contains 5,745 full or partial lines of the original 6,031 tariff lines that were on the proposed list of Chinese imports announced on July 10, 2018. After “a thorough process to rigorously examine the comments and testimony” received over a six-week period and during a marathon six-day public hearing staged in Washington last month, the U.S. Trade Representative decided to remove 286 tariff lines from the original proposed list.

Among the products ultimately spared from the new sanctions were certain consumer electronics gadgets such as smart watches and Bluetooth devices; certain chemical inputs for manufactured goods, textiles and agriculture, certain health and safety products such as bicycle helmets, and child safety furniture such as car seats and playpens.

According to reporting by Bloomberg, sources “familiar with the matter” say the administration “has justified its decision [not to include a tariff exclusion process] by saying that it’s giving companies more than three months to transition their supply chains away from China before it raises tariffs to 25 percent in January.” At present though it remains “unclear whether the government will start offering exclusions once that rate increase occurs next year” and when asked for clarification in this regard, the USTR’s office simply indicated there was “no announcement at this time.”

Supply Chains

Industry groups argue that companies cannot reasonably be expected to shift their supply chains on a dime, a process they say can take months, if not years, to find new suppliers capable of meeting all of a firm’s sourcing requirements. As explained by the Auto Care Association in a letter to the USTR: “supply chains are global and complex. It is not possible to easily or quickly modify supply chains without experiencing a ripple effect. In many cases, companies have no choice manufacturing in China as there are no alternative options due to capacity issues, quality control or customization.”

The disruptive impact on supply chains may not be a wholly unintended consequence of the tariffs, however. Quite to the contrary, it could even be viewed by the White House as a feature not a bug, given the Financial Times reported last year that Trump’s influential trade adviser Peter Navarro “said one of the administration’s trade priorities was unwinding and repatriating the international supply chains on which many U.S. multinational companies rely.”

American Businesses & Economy 
Behind the scenes, business groups are ramping up efforts to oppose the tariffs while pushing for an exclusion process that would cover the latest $200 billion worth of Chinese imports, in addition to the duties Trump has threatened to levy on $276 billion more in response Beijing’s latest retaliatory tariffs on $60 billion worth of U.S. imports, a move that would impose taxes on every Chinese import to the U.S., affecting an estimated 4% of global trade.
In a statement on Trump’s September 17 tariff announcement, House Ways & Means Chairman Kevin Brady (R-TX) said the U.S. should set up a process to exclude key products. “Until China comes to the table, one way to relieve pressure on Americans is establish an effective and timely process to allow products to be excluded from these additional tariffs if tariffs would make it harder for us to sell more ‘Made in America’ products globally,” Brady said.
Most business groups have vehemently opposed the tariffs from the outset, warning they will hurt American consumers, and instead have called for negotiations and a coordinated response with like-minded U.S. allies such as the European Union and Japan.
Pointing to a recent survey of U.S. companies operating in China, it will not be as easy for them to shift production as “certain folks in the administration” have contended, says William Zarit, chairman of the American Chamber of Commerce in China, adding that some businesses will be forced to raise prices as a result, which will put them at a competitive disadvantage.
Asked if the U.S. was negotiating in good faith in light of recent comments made by Trump and his trade officials touting the benefits of tariffs for the economy, Zarit said, “I certainly have to hope that they’re not trying to decouple. I have to hope that, because if they are I don’t think they’re looking at the benefits to the United States of staying engaged with China. And the very, very negative aspects of not staying engaged in China.”
The administration has so far brushed off the growing concerns of business groups as being largely unfounded, stating last week that the Section 301 tariffs “haven’t really had much of an effect on the United States.” Commerce Secretary Wilbur Ross and White House trade adviser Peter Navarro have argued that any negative impacts resulting from the new round of tariffs would be offset by broader economic gains. Navarro told NPR last week that the effect of the tariffs on the economy would be “negligible” and would serve to spur growth and investment in the U.S. Ross, meanwhile, confidently predicted on CNBC that “nobody is actually going to notice it at the end of the day.”

Product List 2 Exclusion Request Process Update

The Trump administration has given companies until October 9 and December 18 to seek exclusions from the tariffs on $50 billion of goods, depending on when they were first implemented.

On September 17, 2018, the USTR released procedures for seeking List 2 product exclusions. As anticipated, the process is very similar to the List 1 exclusion process, however, the USTR is now requiring applicants to provide the following additional information:

  • For imports sold as final products, those seeking relief must provide the percentage of their total gross sales in 2017 that sales of the Chinese-origin product accounted for.
  • For imports used in the production of final products, applicants must provide the percentage of the total cost of producing the final product(s) the Chinese-origin input accounts for and the percentage of their total gross sales in 2017 that sales of the final product(s) accounted for.

List 2 product exclusions must be submitted by December 18, 2018. If granted, exclusions will apply retroactively to the August 23 effective date of List 2 tariffs, and extend for one year after the publication of the exclusion determination in the Federal Register.

Companies so far have filed about 1,700 exclusion requests, but the number that have been approved is unknown.

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