The Future of China Tariffs

By Josh Beker, Givens & Johnston

On August 18, 2017, the United States Trade Representative (USTR) initiated an investigation pursuant to the Trade Act of 1974, as amended (the Trade Act), to determine whether acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are actionable under the Trade Act. An inter-agency investigation formed a “Section 301 Committee” to investigate actions whether China had engaged in actionable conduct under section 301(b)(1) of the Trade Act, including, inter alia, acts, policies and practices of a foreign country that are unreasonable or discriminatory and burden or restrict U.S. commerce. After an affirmative determination of actionable conduct, Section 301 tariffs, commonly referred to as “China Tariffs,” went into effect on July 6, 2018.

Since July of 2018, importers of Chinese merchandise have had the opportunity to apply for exclusions from Section 301 duties based on a variety of economic and product specific criteria. While few exclusions were granted relative to the number of applications and the approval process was at times unpredictable, these exclusions provided relief to importers faced with difficult questions of shifting their supply chains, managing costs, and more recently, cash-flow management as a result of the COVID-19 pandemic. Unfortunately, while the exclusions applied retroactively, they were subject to expire after one year.

In late 2019, with the first rounds of exclusions set to expire, the USTR began an extension process wherein importers could once again provide the USTR with economic and product specific data in hopes of having an exclusion extended. As with the original exclusions, the extensions would be valid for one year. In the extension process, the USTR made a clear effort to determine whether importers were in fact moving their supply chains away from China or were continuing operations in China because of the granted exclusions. Importers were asked to provide financial revenues and product volumes for a period of time in 2018 compared to the same period in 2019, and were explicitly asked to identify “efforts you have undertaken since September 2018 to source this product from the United States or third countries.”

Unsurprisingly, few importers were able to meet the USTR’s criteria for an extension, and exclusion extensions granted relative to the number of applications dropped below the initial approval rates. More concerning to importers however was the fact that many of the once promised one-year extensions in fact turned out to be valid for only six months or fewer. Finally, on August 11, 2020, the USTR published a list of exclusion extensions where of the 1400+ extension requests submitted, only 240 were granted. Furthermore, the USTR has not granted a single extension that expired after 12/31/2020.

At this point, the USTR has made its position abundantly clear: the day of reckoning for importers is drawing near. Whether the USTR’s intent is to “wait out the election” before making a policy shift, or that the USTR is ending this avenue for relief outright, it is clear that importers need to prepare for the permanent imposition of duties with no possibility of relief beginning in 2021. How a full reimposition of an additional 25% in duties will affect importers and supply chains the world over, especially given the global financial crisis born out of the COVID-19 pandemic remains to be seen. Regardless, the USTR has spoken: “China Tariffs” are here to stay.