Section 301 Tariff Exclusions Extended
Note: Constitution Partners was first to publish news of exclusion extensions in early December. You can read about our previous intelligence report here.
On December 26, 2023, the Office of the United States Trade Representative (“USTR”) announced that it will further extend 352 reinstated exclusions and 77 COVID-related exclusions to duties imposed on goods from China pursuant to Section 301 of the Trade Act of 1974 until May 31, 2024. Both the reinstated exclusions and the COVID-related exclusions were previously extended but were set to expire on December 31, 2023. The 352 reinstated exclusions, listed in an annex to this previous notice, cover products from all four prior lists. The 77 COVID-related exclusions, listed in an annex to another previous notice, cover medical-care products needed to address COVID. Additional information is set out in the Federal Register Notice, which can be viewed here. While reviewing the established framework of the Trump exclusion criteria and its efficacy, USTR under President Biden has introduced a series of additional questions for commenters. These seem to narrow the focus while adding additional criteria related to domestic manufacturing, technological development, worker wages, and more. We will highlight these changes at the conclusion.
Upcoming Opening for Public Comments
A docket for public comments on existing exclusions will open on January 22, 2024 and close on February 21, 2024, giving American businesses just one month to restate their case. The docket will be available on USTR’s website.
Context
Section 301 of the Trade Act of 1974 is a statute aimed at combating the United States’ trade partners’ unfair practices. It grants USTR a range of responsibilities and authorities to investigate and take action to enforce U.S. rights under various trade agreements. While the law does not limit the scope of investigations, it cites several types of foreign government conduct subject to Section 301 action, including (1) a violation that denies U.S. rights under a trade agreement, (2) an “unjustifiable” action that “burdens or restricts” U.S. commerce, and (3) an “unreasonable” or “discriminatory” action that “burdens or restricts” U.S. commerce.
Trump Era Tariffs
Former President Trump was more willing than previous officials to act unilaterally under these authorities. Trump imposed tariffs in 2018 and 2019 on thousands of imports from China after a "Section 301" investigation concluded that four broad policies or practices justified U.S. action: (1) China’s forced technology transfer requirements, (2) cyber-enabled theft of U.S. IP and trade secrets, (3) discriminatory and non-market-based licensing practices, and (4) state-funded strategic acquisition of U.S. assets. Subsequently, as part of its efforts to pressure China to change these practices, the United States imposed additional tariffs, of up to 25%, on certain U.S. imports from China in four separate lists:
List 1: effective on or after July 6, 2018 with an additional 25% tariff and approximate annual trade value of $34 billion.
List 2: effective on or after August 23, 2018 with an additional 25% tariff and approximate annual trade value of $16 billion.
List 3: effective on or after September 24, 2018 with an additional 25% tariff and approximate annual trade value of $200 billion.
List 4A: effective on or after September 1, 2019 with an additional 7.5% tariff and approximate annual trade value of $300 billion list.
During the Section 301 notice, hearing, and comment period on proposed tariff increases, USTR heard from numerous stakeholders who expressed concerns about how additional tariffs could affect U.S. firms and consumers. In response, for each new list of covered products, USTR created a process whereby interested parties could request that a particular product be excluded from the tariffs, subject to certain criteria.
The tariff exclusion process enabled interested parties to petition for an exemption from the Section 301 tariff increases for specific imports. While USTR approved, on average, 35% of new requests under the first two actions, the approval rates under the third and fourth actions were 5% and 7%, respectively. According to USTR, all requests were evaluated on a case-by-case basis. The agency indicated that, in determining which requests to grant, it considered the following:
Availability of the product in question from non-Chinese sources
Attempts by the importer to source the product from the United States or third countries
The extent to which the imposition of Section 301 tariffs on a particular product will cause severe economic harm to the importer or other U.S. interests
The strategic importance of the product to “Made in China 2025” or other Chinese industrial programs.
Past exclusions were also granted for reasons that are thought to include, among others, U.S. national security interests and demonstrable economic hardship from the tariffs for small businesses. Through January 2020, USTR received a total of 52,746 new exclusion requests, pertinent to all actions. Of these, 6,804 (13%) were granted and 45,942 (87%) were denied.
Biden Era Tariffs
When President Biden assumed office and inherited these ongoing tariffs, there was hope that his administration, helmed by USTR Katherine Tai, would reduce or even eliminate the additional tariffs. In May 2022, Biden’s USTR began the statutory four-year review of the Section 301 actions taken against China by the Trump Administration, characterized by USTR as Phase I. By law, the tariffs expire after four years unless a representative of a domestic industry that benefited from the tariffs submits a written request for continuation. Thus, the first step in the four-year review process involves notification to representatives of domestic industries which are impacted under Section 301 and of the opportunity for these representatives to request continuation or termination of the actions.
USTR previewed the Biden plan, called Phase 2, on October 12, 2022 as part of the Section 301 Four-Year Review. All interested parties — including parties objecting to the continuation of the tariffs — had an opportunity to comment between November 15, 2022, and January 17, 2023 on “(1) the effectiveness of the action in achieving its objectives, (2) the effects of such actions on the U.S. economy, including on consumers, and (3) other potential actions that could be taken. More specifically they asked:
The effectiveness of the actions in obtaining the elimination of China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation.
The effectiveness of the actions in counteracting China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation.
Other actions or modifications that would be more effective in obtaining the elimination of or in counteracting China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation.
The effects of the actions on the U.S. economy, including U.S. consumers.
The effects of the actions on domestic manufacturing, including in terms of capital investments, domestic capacity and production levels, industry concentrations, and profits.
The effects of the actions on U.S. technology, including in terms of U.S. technological leadership and U.S. technological development.
The effects of the actions on U.S. workers, including with respect to employment and wages.
The effects of the actions on U.S. small businesses.
The effects of the actions on U.S. supply chain resilience.
The effects of the actions on the goals of U.S. critical supply chains outlined in Executive Order 14017 and in subsequent reports and findings.
Whether the actions have resulted in higher additional duties on inputs used for additional manufacturing in the United States than the additional duties on particular downstream product(s) or finished good(s) incorporating those inputs.
USTR received 1,497 public comments, the majority of which were in favor of removing certain tariffs.
The Biden Administration itself has wavered on its Section 301 position over time. During Phase 1, they were tossing around the idea of eliminating more tariffs to ease inflation. However, Tai held firm that the Section 301 tariffs were not going away any time soon. Just last month, December 2023, Tai was quoted at the Aspen Security Forum saying ending the tariffs would be “insensitive to the dynamics in the global economy and the U.S. economy.” She continued that that the days of enacting trade agreements that lowered domestic tariffs in exchange for the partner country to lower its tariffs for U.S. goods have reached the twilight of its years.
U.S. International Trade Commission Report
Analysts say the tariffs have had a mixed track record. There are fewer imports from China of the items on the long tariff list, but it's not clear American manufacturers have gained all the benefits. Imports from Vietnam have more than doubled since the tariffs went into effect. And earlier this year, an independent nonpartisan agency, the U.S. International Trade Commission (ITC), released a report that found American importers, not the Chinese, have borne most of the costs.
In a mixed ruling mandated by the 2022 Consolidated Appropriations Act, the three-judge panel found that the tariffs were lawful but that the Trump Administration violated the Administrative Procedures Act (APA). It also ruled that actions like this are reviewable by courts – the Biden Administration argued that it wasn’t. The appendix of the report included an excerpt of comments from American businesses, including clients of Constitution Partners.
The court ordered USTR to respond to the thousands of comments submitted years ago urging a different course of action by June 30, permitting but not requiring them to make changes to the tariffs. In the meantime, the tariffs will continue due to the “disruptive consequences” of removing them for potentially only a limited period of time.
Industry Responses to Most Recent Extension
It’s becoming unclear when (or even if) USTR will publish its proposed changes to Section 301 tariffs imposed during the Trump administration. However, the new emphasis on domestic manufacturing, U.S. technological development, worker wages, etc. asked in the Biden Administration’s Phase 2 request for comments are likely indicative of what a new tariff design and request regulation would look like. If they decide to do so before the election, that should form the basis for our updated comments due by the end of February.
Of course, USTR Katherine Tai previously told lawmakers she expected the review would be completed by fall of 2023, a year ahead of the 2024 presidential election. The lack of advance warning for these exclusion extensions has created challenges for companies planning future shipments.
“We are disappointed that USTR continues to drag out this review despite receiving hundreds of comments from businesses large and small who have been negatively impacted by the tariffs. It is imperative that USTR announce the results of the review promptly,” said Americans for Free Trade (AFT), which represents more than 160 U.S. business associations and millions of U.S. workers.
“These exclusions are needed to provide economic relief for American businesses, especially during a time of unprecedented disruptions to global supply chains,” AFT continued, praising the extension, but underscoring frustration that “USTR announced this short-term extension with little notice, making it difficult for businesses to plan.” Many American small businesses share AFT’s concerns and feel as though they have become collateral damage.
Constitution Partners Insights
While USTR’s press release provided no further details regarding the status of the four-year review or when its conclusion should be expected, we have a great relationship with our clients' congressional delegations and their staff who work hard to get us more information. As you know, we were given a heads up on the end-of-year extension and were told that the Biden Administration wants the Section 301 tariffs to continue in tandem with Ambassador Tai’s Four-Year Review period. This is a testament to the success of our 2023 Capitol Hill meetings and advocacy in between.
Next Steps
Constitution Partners is already assisting companies to prepare, draft, and submit public comments. We will also monitor future opportunities for partners to testify in front of USTR as we have secured for clients in the past.