Trade tensions between China and the US continue, following China's August 23 announcement that it would levy additional tariffs on US$75 billion worth of US imports. In response, President Trump and the Office of the US Trade Representative (USTR) announced that tariffs levied on Chinese imports would increase, again, pursuant to section 301 of the Trade Act of 1974.
Products imported from China valued at US$250 billion were already subject to a 25 percent tariff as a result of the China section 301 investigation when, according to a press release from the USTR, the President instructed an increase in this tariff rate, following a notice and comment period, to 30 percent, effective October 1. This US$250 billion worth of imports covers all products under the HTS codes identified in List 1, List 2 or List 3 of the investigation.
Tariffs on an additional US$300 billion worth of Chinese imports are also scheduled to go into effect in two waves. The first wave, covering products under List 4A, will see a tariff increase on September 1, 2019. The second wave, covering products under List 4B, will see a tariff increase on December 15, 2019. In addition, the List 4 tariff increases, previously noticed to be set at 10 percent, have been increased to 15 percent, according to the USTR.
The tariffs effectively cover nearly every product imported from China, with some notable exceptions. One exception in particular is for products granted an "exclusion" from section 301 tariffs by the USTR. These exclusions are available for products upon request by an interested party, but only if the USTR has granted the request in accordance with certain administrative guidelines. The period to request exclusions for products on List 1 or List 2 has ended. The period to request exclusions for products on List 3 closes September 30, 2019. The USTR has indicated that it will allow exclusion requests to be submitted for List 4 products, but details regarding timing and procedure have yet to be announced.
Given the rapid pace of these tariff increases, it is unclear how the 5 percent increase will affect products for which an exclusion request was already granted or is pending. Suppliers, purchasers and manufacturers of products included on List 3 and List 4 should seriously consider submitting an exclusion request to avoid the additional exposure. The USTR is also required to hold a public notice-and-comment period prior to issuing any increase on tariffs for products on Lists 1, 2 and 3. While instructions regarding the notice-and-comment period are forthcoming, past 301 tariff actions allowed interested persons to submit written comments and/or testify before the 301 Commission to discuss the tariffs' consequences.
As far as US exports to China are concerned, China announced the following measures:
- Counter-retaliatory tariffs of between 5 and 10 percent on US$75 billion worth of US merchandise.
- A declaration that the new tariffs will be effective on the same dates as the US List 4 tariffs, namely, September 1 and December 15. For instance, China levied a 10 percent duty on beef, chicken and pork, effective September 1; and a 10 percent duty on cotton, sorghum and wheat, effective December 15. Also, it increased the 25 percent duty on US soybeans to 30 percent, effective September 1, and imposed, for the first time, a 5 percent levy on crude oil (but no new tariff on LNG, which is currently subject to a 25% tariff). Also targeted by China: US-manufactured small aircraft.
- A lifting of the moratorium on tariffs on US autos and auto parts, a goodwill gesture in place since April 2019, thus restoring, effective December 15, the 25 percent tariff on cars and the 5 percent tariff on parts. After factoring in existing duties, tariffs on US autos can total as much as 50 percent.
China, for its part, has also created an exclusion request process for US products. Firms in China that import, produce or use US imports on China's List 2 may request an exemption from China's Ministry of Commerce between September 2, 2019, and October 18, 2019.
What does all this mean, and how can you respond?
In addition to availing yourself of the notice-and-comment and exclusion-request processes, there are some other short-term measures you may wish to consider. If you are affected by the 301 tariffs, you may want to assess your supply chains to determine what mitigating steps may be taken, if any. This includes (1) reviewing HTS codes to determine whether products are properly classified; and (2) contract terms and supply agreements to determine tariff exposure and whether there is any ability to shift or recoup costs. In the deal context, you may want to assess whether a target's tariff exposure is truly a long-term risk that could affect its going-forward value.
While it is uncertain what the US and China will do going forward, it is clear that neither side has yet to deploy every weapon in its arsenal. Each retaliatory action is accompanied by a ratcheting up of the trade rhetoric, causing market volatility. Accordingly, you should assess what this escalating tension means for their long-term financial and legal exposure. Already, many US manufacturers are choosing to re-shore production to a third country in order to avoid the volatility of what has proven to be an unexpectedly long trade confrontation.
It is also important to consider the broader context. This tariff war is just one of many conflicts between China and the US. On August 4, the US designated China a "currency manipulator" under the Omnibus Trade and Competitiveness Act of 1988. Meanwhile, China has announced that it is considering restricting rare earth exports, limiting licenses for American firms to operate in China, and reducing Chinese tourism and students traveling to the US. In this past week, China promised sanctions on US firms as a result of the US's US$2 billion arms sale to Taiwan. Protests in Hong Kong further complicate the picture. Speaking for the President, Vice President Pence said the chances of a trade deal with China would diminish if fails to honor the commitment [it] made in 1984 through the Sino-British joint declaration to respect the integrity of Hong Kong's laws. In addition, disputes continue over US export controls involving Chinese technology firms. Whether the current trade challenges continue on their own trajectory, or begin to merge with these other geopolitical challenges, Dentons stands ready on both sides of the Pacific to bridge the gap and help clients succeed on any field.
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