Editor: Kevin D. Anderson, CPA, J.D.
In August 2017, the U.S. Trade Representative (USTR) launched an investigation under Section 301 of the Trade Act of 1974, P.L. 93-618, of China's controversial policies related to intellectual property, technology, and innovation. Consequently, and over the 24 months that followed, the USTR implemented four rounds of tariff increases on Chinese goods worth $370 billion in total to counter China's perceived unfair trade practices. Throughout this process, the two countries have been involved in back-and-forth negotiations and tit-for-tat tariff increases, leading to significant economic tensions between the world's two largest trading partners.
A temporary trade truce
On Jan. 15, 2020, the United States and China signed a limited "phase one" trade agreement, which officially de-escalated the trade war. According to the agreement, the United States rolled back certain Section 301 tariffs, while China pledged to expand its trade purchases and make major structural changes relating to intellectual property protection, technology transfer, agricultural standards, financial services, and currency practices. Notwithstanding the limited trade truce, the initial three rounds of the Section 301 tariffs remain unchanged, and no further developments in the ongoing trade negotiations between the two countries are expected this year because of the impending U.S. presidential election in November.
In April 2018, the USTR determined, based on its investigation, that China's trade policies are unreasonable or discriminatory and thus justified U.S. actions against China under Section 301 (83 Fed. Reg. 14,906). Specifically, the USTR determined that China:
- Uses joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to force or pressure technology transfers from U.S. companies to a Chinese entity;
- Maintains unfair licensing practices that prevent U.S. companies from getting market-based returns for their intellectual property;
- Directs and facilitates investments and acquisitions that generate large-scale technology and IP transfer to support China's industrial policy goals, such as the Made in China 2025 initiative; and
- Conducts and supports cyber intrusions into U.S. computer networks to gain access to valuable business information.
As a result, the USTR increased tariffs ultimately on four tranches of products originating from China, with a combined value of $370 billion, as shown in the table "Schedule of Section 301 Tariff Increases" (below)
Section 301 product exclusions
The USTR established processes for companies to request product-specific exclusions from the additional tariffs imposed on all four lists of products. The period for submitting an exclusion request has closed for all four lists. The USTR has completed reviewing all the List 1 and 2 exclusion requests and has granted a number of product exclusions — but far more petitions were denied than were approved. The reviewing processes for List 3 and List 4A products are still ongoing, and the USTR has granted several rounds of List 3 product exclusions as of February 2020, as shown in the table "Schedule of Section 301 Exclusions" (below).
Excluded products are exempt from the China Section 301 tariffs for one year after the exclusion notice is published in the Federal Register. Companies can also seek duty refunds retroactively to the date the collection of the duties began (depending on the list corresponding to the subject product).
Notably, Section 301 exclusions are not specific to the requestor. Any company importing a product covered by an exclusion may import the goods under the exclusion and request retroactive duty refunds. Many companies that were affected by the Section 301 China tariffs may not be aware that their imported products have been excluded, because of their nonparticipation in the exclusion process; i.e., a competitor applied instead, and that petition for exclusion was approved. Therefore, such companies should consider the following mitigation strategies:
- Review the published lists of granted exclusions for the imported products at issue (including the specific product exemption descriptions in Chapter 99 of the Harmonized Tariff Schedule of the United States (HTSUS)) and identify immediate duty refund opportunities;
- Review the regular product descriptions and corresponding tariff codes as set forth in HTSUS Chapters 1-97 to verify that the affected HTSUS codes are correctly classified;
- If the imported goods are manufactured/assembled in multiple countries before importation to the United States, review the country-of-origin determination to gauge compliance with customs laws and regulations — especially to ascertain if the country of origin can be one other than China; and
- Explore customs valuation strategies to reduce the declared value of the impacted products, such as use of the "first sale rule" or other cost-unbundling analyses.
Kevin D. Anderson, CPA, J.D., is a managing director, National Tax Office, with BDO USA LLP in Washington, D.C.
For additional information about these items, contact Mr. Anderson at 202-644-5413 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with BDO USA LLP.