Among the announcements made were that (1) a Section 301 product exclusion process would be “restarted” with respect to the tariffs currently in effect, and (2) additional enforcement actions against China could be initiated, potentially to include another Section 301 investigation. Recall that the existing tariffs were imposed beginning in March 2018 under Section 301 of the Trade Act of 1974, pursuant to an investigation concerning “China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation.”

On Tuesday, October 5, the USTR announced as a first step toward (1) that it would open a proceeding to consider whether to renew any Section 301 product exclusions that had previously been granted and that had previously been extended. The USTR granted about 2,200 product exclusions between 2019 and 2020, and 549 of those were subsequently extended. Those 549 exclusions are now up for renewal. Comments are being invited on whether this particular universe of previously granted exclusions should be reinstated. USTR will be looking for information on (1) whether the product remains available only from China, (2) changes in the product’s global supply chain/relevant industry developments since September 2018, (3) efforts importers have taken since September 2018 to source the product from the U.S. or third countries, and (4) domestic capacity for producing the product. Any reinstated exclusions will be retroactive to October 12, 2021 and run for a time period yet to be determined.

It is possible that this exclusion renewal process is only a first step preceding a more extensive reopening of the product exclusion process, although no concrete indications of that have been made by the Administration. We will continue to make announcements as opportunities arise.

The Federal Register notice announcing the exclusion renewal process is available here. The USTR’s official list of 549 previously extended exclusions is available here. We have also prepared a fully sortable Excel based version of USTR’s list, available here. The comment period will be open between October 12, 2021 and December 1, 2021. We are available to assist with the preparation of comments either supporting or opposing renewal of exclusions on any of the listed products. Please let us know if you have any questions.

The initial Section 301 action was brought against 10 countries, however, USTR also announced it was formally terminating cases against Brazil, the Czech Republic, the European Union and Indonesia because these countries had not implemented or adopted any digital service taxes. USTR’s announcement did not address a separate Section 301 digital services action brought against France, covering $1.3 billion worth of French goods that was suspended by the previous administration.

For the cases going forward, each of USTR’s notices requests comments and information from parties on whether action is appropriate, and if so, the appropriate action to be taken. In particular, USTR seeks comments on:

• The level of the burden or restriction on U.S. commerce resulting from the country at issue’s DST.
• The appropriate aggregate level of trade to be covered by additional duties.
• The specific products to be subject to increased duties, including whether USTR’s proposed lists should be retained or removed, or whether tariff subheadings not currently on the list should be added.
• The level of the increase, if any, in the rate of duty on items covered.

USTR’s federal register notices, and prior relevant documents concerning the agency’s investigations, are available at the agency’s website. Among the products identified on USTR’s six lists are seafood, children’s clothing, jewelry, and certain furniture items. If you require assistance responding to USTR’s request, please don’t hesitate to contact Kelley Drye’s international trade team.

[1] Digital service taxes apply to revenues that certain companies generate overseas from the provision of digital services to, or aimed at, users in those jurisdictions. Taxable digital services might include providing digital interface, targeted advertising, and the transmission of data collected about users for advertising purposes. The goods identified on USTRs list are not specifically linked to services subject to the relevant DSTs.

First Set of Exclusions Set to Expire December 28, 2019

The relevant product exclusions were granted December 28, 2018 in USTR’s initial set of exclusions from Section 301 duties on Chinese imports that took effect July 6, 2018. The 25 percent tariff covered more than 800 tariff lines, representing approximately $34 billion in annual trade value. In its December 28 action, USTR granted exclusions for more than 1,000 specific products classified within a tariff-covered 8-digit HTSUS subheading.

USTR subsequently issued seven more rounds of product exclusions from its July 6, 2018 tariff action (all expiring one year from the date of publication in the Federal Register) and continues considering exclusion requests for subsequent tariff actions. While additional extension request opportunities are anticipated going forward, the current opportunity only covers exclusions granted on December 28, 2018.

As detailed in a draft Federal Register Notice, USTR will evaluate the possible extension of each exclusion on a case-by-case basis. USTR has indicated it will focus its evaluation on whether the product under consideration remains only available from China. USTR will also consider whether additional duties would result in severe economic harm to U.S. interests. Additionally, USTR has asked commenters to address:

• Whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
• Any changes in the global supply chain since July 2018 with respect to the particular product, or any other relevant industry developments.
• The efforts, if any, the importers or U.S. purchasers have undertaken since July 2018 to source the product from the United States or third countries.
• USTR is also interested in whether the product or products are subject to an antidumping or countervailing duty order issued by the U.S. Department of Commerce.

Further, USTR is requiring commenters who are importers and / or purchasers of the products in question to submit additional “business confidential” information via a separate “Form B.” Among other things, Form B requests detailed financial information as well as specific details regarding entities’ attempts to source the product(s) in question from the United States or other third countries. Form B, a sample of which is also included in the Federal Register Notice, will not be published on the public portal.

Importers of products on List 4A may file exclusion requests with the agency beginning October 31, 2019 through January 31, 2020. Once USTR posts a request, there is a 14-day comment period for interested stakeholders to oppose or support, followed by a 7-day rebuttal period for the requestor to respond. USTR will grant approvals and denials on a rolling basis.

If granted, any importer of a product may utilize an exclusion, which would apply retroactively to the September 1, 2019 effective date. Importers may use an exclusion going forward, and also may seek duty refunds through U.S. Customs and Border Protection. USTR has set a uniform expiration date of September 1, 2020 for List 4A exclusions, regardless of the date they are granted.

The exclusion process does not cover products on List 4B, which are scheduled to be assessed an additional 15 percent duty effective December 15, 2019. Cabinet officials have suggested the President may forgo increasing tariffs on List 4B products pending the outcome of ongoing negotiations with China to address IP violations, forced technology transfer and cyber intrusions.

Section 301 tariffs on List 3 originally went into effect in September 2018 at a level of 10%. On March 10, 2019, the List 3 tariffs increased to 25%. That increase triggered an exclusion process, which opened June 30, 2019. The exclusion process, administered by the Office of the U.S. Trade Representative (“USTR”), will be similar to the exclusion request procedures implemented with respect to tariffs on List 1 and List 2 imports. Requests for a Section 301 tariff exclusion for a particular imported good from China may be submitted any time through September 30, 2019. Interested parties may object to the request within 14 days. The original requesting party may then submit a reply 7 days thereafter. USTR will evaluate each exclusion request based on several considerations, including whether the product is only available from China; whether a comparable product is available in the United States or from a third country; whether the party requesting the exclusion has tried to source the product from the United States or a third country; whether the imposition of the Section 301 tariff will cause “severe economic harm” to the party requesting the exclusion; and whether the product is strategically important to China.

On May 13, 2019, the Administration announced plans to impose Section 301 tariffs on the remaining Chinese imports, valued at $300 billion (“List 4”). USTR held public hearings on the proposed list of covered goods in mid-June. On June 29, 2019, however, President Trump announced that, as the result of negotiations with President Xi Jinping of China, the imposition of tariffs on List 4 goods will be halted for now.

All merchandise entered after June 1^st will be subject to the 25% rate.

The U.S. Trade Representative also issued a Notice modifying the implementing instructions regarding merchandise in foreign trade zones. According to the May 10^th Notice, merchandise subject to the Section 301 third tranche and admitted into a foreign trade zone in “privileged foreign” status will retain that status and will be subject, at the time of entry for consumption (i.e. entered into the commerce of the U.S.) to the additional duty rate that was in effect at the time of FTZ admission of the goods. Therefore, merchandise entered into a foreign trade zone as privileged foreign status prior to May 10^th will be locked into the 10% rate.

USTR’s notice follows President Trump’s announcement of his decision to delay the March 2, 2019 deadline for increasing tariffs on List 3 items due to “substantial progress” in his administration’s talks with China, as well as Ambassador Lighthizer’s testimony before the House Ways and Means Committee concerning the same issue.

The 10% percent duties, which took effect on September 24, 2018, were initially set to increase to 25% on January 1, 2019, but that deadline was delayed to March 2, 2019 pursuant to a December 19, 2018 Federal Register notice. USTR’s March 5, 2019 notice does not establish a new deadline for an increase in duties, but instead leaves the possibility of an increase open.

As Ambassador Lighthizer indicated in his testimony to the House Ways and Means Committee, there has been no agreement to remove the current 10% tariff on List 3 items, though the removal of such tariffs is a negotiating objective of the Government of China. We will continue to monitor further developments regarding the Trump Administration’s Section 301 tariffs and trade negotiations with China.

For example, the imported Chinese components processed in a third country may nonetheless be subject to section 301 duties when imported into the United States unless they are “substantially transformed” into a new and different article of commerce in the third country. This is a product-specific analysis and involves a review of components and production steps. Recently, the Court of International Trade ruled that mere assembly of foreign component parts does not constitute substantial transformation. (Energizer Battery Inc. v. United States, 190 F. Supp. 3d 1308 (Ct. Intl. Trade 2016). The decision noted that, “whether there has been a substantial transformation depends on whether there has been a change in the name or use of the components.” The court focused not on whether “the components as imported have the form and function of the final product” but rather “whether the components have a pre-determined end-use at the time of importation.” The court suggested that the imported parts would need to undergo “further work” beyond mere assembly to be considered substantially transformed.

It is worth noting that Customs cited the Energizer action in its recently released ruling, HQ H300226, in which the importer argued that electric motors should be considered country of origin Mexico where the Chinese components are imported to Mexico and assembled into the electric motors. Customs ruled that based on the NAFTA tariff shift rules, the product qualified as a product of Mexico only for marking purposes; however, in accordance with Energizer, the production process performed in Mexico is “mere simple assembly and the foreign subassemblies are not substantially transformed.” Accordingly, for origin purposes, the country of origin of the motor remained the country of origin of the parts -- China.

HQ H300226 is significant as it is the first ruling issued post enactment of the Section 301 duties which makes the distinction between country of origin for marking vs. origin purposes. Customs makes it clear that when “considering a product that may be subject to antidumping, countervailing, or other safeguard measures, the substantial transformation analysis is applied to determine the country of origin.” The same would be true of section 301 duties. Once the product is determined to be country of origin China, the importer will be assessed the additional Section 301 duties of 10-25%.