On May 13, 2019, the Office of the United States Trade Representative (“USTR”) released a draft Federal Register notice beginning the process to subject virtually all remaining imports from China (the so-called “Tranche IV”) to tariffs pursuant to Section 301 of the Trade Act of 1974.1 This announcement follows closely on the heels of an announcement by USTR that tariffs on approximately $200 billion worth of imports from China (the so-called “Tranche III”) would increase from 10 to 25 percent.2 The US government has clarified that Chinese products that were exported to the United States prior to May 10, 2019, are not subject to the increase from 10 to 25 percent as long as they are entered for “consumption” prior to June 1.3
The May 13 draft notice requests comments on a proposed 25 percent ad valorem duty on additional imports from China, 3,805 products that are collectively valued at approximately $300 billion.4 A list of the products, organized by tariff subheadings, was included in an annex to USTR’s notice.5 As expected, the list is comprehensive and includes consumer items such as smartphones, computers and textiles, as well as industrial products such as iron and steel pipes. However, imports of pharmaceuticals, certain pharmaceutical inputs, certain medical devices, rare earth materials and critical minerals are not included in the annex.6
The draft notice provides details on the deadlines for submitting comments on the proposed tariffs and the schedule for public hearings. Specifically, the deadline for submitting requests to appear at the public hearing, along with a summary of expected testimony, is June 10, 2019.7 The deadline for submitting written comments is June 17, 2019, when the Section 301 Committee will also convene the public hearing on the proposed tariffs.8 Any post-hearing rebuttal comments must be submitted seven days after the last day of the public hearing.9
China’s Response to Tranche III
For its part, China responded to the US increase in tariffs on Tranche III by announcing on May 13, 2019, an increase in the tariffs applicable to three of the four lists that make up China's version of Tranche III countermeasures.10 Specifically, the tariff applicable to (a) List 1 of China’s Tranche III will increase from 10 to 25 percent;11 (b) List 2 of China’s Tranche III will increase from 10 to 20 percent;12 and (c) List 3 of China’s Tranche III will increase from 5 to 10 percent.13 The tariff imposed on US goods appearing on China’s List 4 will remain for the time being at 5 percent.14 All tariff increases by China will take effect June 1, 2019.
List 1 of China’s Tranche III consists of 2,493 tariff codes, covering, inter alia, sheep, horse meat, honey, starch, sugar, mango juice, lime, liquefied natural gas, calcium, sodium sulfate, toluene, methanol, glutamic acid, urea, perfume, lip cosmetics, ophthalmic cosmetics, laser printers and tablets. List 2 of China Tranche III consists of 1,078 tariff codes, covering, inter alia, linseed, vodka, mineral water, toothpaste, plastic toilet seats and covers, toilet paper, rivets, springs, thermal printers, shredders and bearings. List 3 of China Tranche III consists of 974 items, covering, inter alia, frozen sweet corn, roasted peanuts, sodium acetate, first aid kits, electrical blankets, vehicle rearview mirrors, fire extinguishers, painting robots and diapers. List 4 maintained by China consists of 595 tariff codes, covering, inter alia, magnesium chloride, xylitol, ether, fireworks, firecrackers, solar water heaters, parts for oil or gas drilling machines, 3D printers, stethoscopes and dentures.
China’s Launch of a Product Exclusion Process
Amid all the talk of tariffs and retaliation, the Customs Tariff Commission of China’s State Council announced on May 13, 2019, that the country will soon launch a product exclusion process related to its Section 301 countermeasures. US products covered by China Tranches I - III are eligible for exclusion as long as there is no revocation or suspension in place. Products for which China’s countermeasures (e.g., tariffs) have been revoked or suspended (e.g., certain automobiles and auto parts) are not eligible.15
For products on China Tranches I16 and II,17 the Ministry of Finance will start accepting applications for exclusion on June 3, 2019, with a deadline of July 5. For products on China Tranche III, the process will start on September 2, 2019, with a deadline of October 18.
Escalating Trade Tensions
The tariff increases announced by the United States and China, together with the release of the proposed US Tranche IV, reflect an escalation of trade tensions between the two countries. Meanwhile, both countries have granted a grace period for their respective tariff increases. As noted previously, the United States exempts Chinese products that were exported prior to May 10, 2019, and entered (or withdrawn) for consumption prior to June 1 from its tariff increase. China’s tariff increases will not take effect until June 1. In addition, whether the United States will actually impose Section 301 tariffs on additional Chinese imports (i.e., those on US Tranche IV) remains a question. President Trump indicated on the same day of the May 13 draft notice that he has yet to make a final decision on that issue. Based on the timeline discussed above, the earliest that US Tranche IV could go into effect would be June 24, 2019, which leaves open the possibility that the two sides could come to an agreement beforehand.
Prospects for a trade deal between the two countries remain uncertain. According to Larry Kudlow (director of the US National Economic Council), China has invited US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin for additional talks in Beijing, but neither government has confirmed a date for those talks.18 President Trump has stated that he will meet with China’s President Xi at the G20 Summit from June 28 to 29 in Osaka, Japan.19
Takeaways for Business
Interested parties should continue to closely monitor developments in this matter and take timely actions to avail themselves of duty avoidance opportunities offered by either side, including participation in the US public comment and/or the Chinese product exclusion process. Additionally, parties that are exploring potential changes to their Chinese production supply chain should carefully consider the complex US customs rules and judicial precedent that govern this area of the law.
2 Mayer Brown Legal Update, US Tariff Increase on $200 Billion Chinese Imports Kicks In Today, available at https://www.mayerbrown.com/en/perspectives-events/publications/2019/05/us-tariff-increase-on-$200-billion-chinese-imports-kicks-in-today (“Mayer Brown May 10 Legal Update”).
3 Our May 10 Legal Update explained that “in order to retain the 10 percent rate in this situation, importers will need to follow certain special filing procedures yet to be announced.” US Customs and Border Production (“CBP”) has issued instructions for the special filing procedures. CBP, CSMS #19-000238, UPDATE- Section 301 (Tranche 3) Duties as of May 10, 2019, available athttps://csms.cbp.gov/viewmssg.asp?Recid=24229&page=&srch_argv=19-000238&srchtype=all&btype=&sortby=&sby=.
4 USTR, Request for Comments Concerning Proposed Modification of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, available at https://ustr.gov/sites/default/files/enforcement/301Investigations/May_2019_Proposed_Modification.pdf (“May 13 Draft Notice”).
11 List 1 of China Tranche III may be found here: http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201905/P020190513719203602248.pdf.
12 List 2 of China Tranche III may be found here: http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201905/P020190513719204287788.pdf.
13 List 3 of China Tranche III may be found here: http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201905/P020190513719204715521.pdf.
14 List 4 of China Tranche III may be found here: http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201905/P020190513719205123756.pdf.
16 China Tranche I may be found here: http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201806/P020180616034361843828.pdf.
17 China Tranche II may be found here: http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201808/P020180808696052416638.pdf.
18Wall Street Journal, China Invites U.S. Negotiators to Continue Trade Talks, White House Economics Adviser Says (May 12, 2019), available at https://www.wsj.com/articles/china-invites-u-s-negotiators-to-continue-trade-talks-white-house-economics-adviser-says-11557684021?utm_campaign=Marketing_Cloud&utm_medium=email&utm_source=Standalone+-+China+announces+tariff+retaliation+and+exclusion+process+-+May+13& utm_content=https%3a%2f%2fwww.wsj.com%2farticles%2fchina-invites-u-s-negotiators-to-continue-trade-talks-white-house-economics-adviser-says-11557684021.
19 Wall Street Journal, Trade Fight Escalates as China Hits U.S. With Higher Tariffs (May 13, 2019), available at https://www.wsj.com/articles/china-to-raise-tariffs-on-certain-u-s-imports-11557750380?mod=hp_lead_pos2&utm_campaign=Marketing_Cloud&utm_medium=email&utm_source=Standalone+-+China+announces+tariff+retaliation+and+exclusion+process+-+May+13& utm_content=https%3a%2f%2fwww.wsj.com%2farticles%2fchina-to-raise-tariffs-on-certain-u-s-imports-11557750380%3fmod%3dhp_lead_pos2.