Automotive Companies Impacted by Expanded Section 301 Tariffs Given Possibility of Product-Specific Exclusions
The latest announcement of new Section 301 tariffs on imports from China contained an unwelcome surprise for the U.S. automotive sector. In addition to the announcement of a potential Section 232 tariffs or other trade measures on imported automobiles and automotive parts (an investigation that is still ongoing), the Trump Administration now has announced a list of $200 billion in special Section 301 tariffs on over 6000 types of products imported from China. And to add further to the import-related misery, the Trump Administration then upped the ante by increasing the potential duties on the $200 billion of new annual trade from 10 to 25 percent, thereby proposing a new tax on imports in the range of $50 billion per year.
To help automotive companies navigate this new likely tax on imports, this update describes the current state of play for the Section 301 tariffs and outlines strategies that importers and consumers of Chinese goods, parts, and components can take to help deal with the three rounds of Section 301 tariffs.
The Trump Administration has imposed duties under Section 301 of the Trade Act of 1974 to counter what the Administration claims is China’s forced technology transfer rules and other industrial policies that are designed to give Chinese companies access to the R&D and business know-how of U.S. companies that operate in China. Under the Section 301 process, these special tariffs are imposed on entire categories of merchandise, as defined by the 10-digit harmonized tariff system code.
The U.S. Trade Representative has announced a Section 301 tariff exclusion process, which allows U.S. companies to petition the government for specific products to be exempted from the duties. This exclusions process allows companies to argue that their own, specific imports should be exempted from the special 25 percent ad valorem tariffs.
The U.S. Trade Representative has indicated that in determining which requests to grant it will consider a number of factors, including whether the product in question is available from non-Chinese sources and whether the new 25 percent Section 301 tariff would cause “severe economic harm” to the importer or other U.S. interests. The process here will be open only for a limited time. Companies seeking exclusions must file the request within ninety days (i.e., by October 9, 2018). Following a public posting of the request on Regulations.gov (under docket number USTR-2018-0025), the public will have fourteen days to file a response to the request. After the close of that fourteen-day period, any interested person will have any additional seven days to reply (either in support of or in opposition to the request).
If the U.S. Trade Representative issues an exclusion for List 1, it will apply for one year (retroactive to July 6th). This means that companies that are filing an exclusions request while actively importing the product should carefully keep track of all entries, since they may need to seek a refund on an individual-entry basis of any section 301 tariffs paid should the exclusion request succeed. In all likelihood, a similar exclusions process will be set for Lists 2 and 3.
Any exclusion request “must specifically identify a particular product, and provide supporting data and the rationale for the requested exclusion.” Specifically, the request “must include the following information”:
- The ten-digit subheading of the HTS applicable to the exclusion request.
- Identification of the particular product “in terms of the physical characteristics (e.g., dimensions, material composition, or other characteristics) that distinguish it from other products within the covered 8-digit subheading.”
- The “annual quantity and value of the Chinese-origin product that the requester” or trade association purchased “in each of the last three years.”
- A certification that the information submitted is complete and correct.
In addition, each exclusion request “should address” the following factors:
- Whether the particular product is available only from China. In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
- Whether the imposition of additional duties on the particular product would cause severe economic harm to the requester or other U.S. interests.
- Whether the particular product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
Notably, the USTR specifically states that it “will not consider requests that identify the product at issue in terms of the identity of the producer, importer, ultimate consumer, actual use or chief use, or trademarks or tradenames.” These restrictions will make it difficult or impossible to argue that companies that import from affiliates, subsidiaries, or joint ventures located in China should be exempted solely because the company brings over branded products or those that it has tailored to its own use in downstream production. Instead, companies will need to develop information grounded in the general product characteristics to support an exclusions request.
Automotive companies that import products from China should carefully review the various lists of products to determine whether their imports are covered by the imposed or prospective tariff lists. Companies also should evaluate whether they have valid reasons to seek an exclusion. Potential winning arguments can include the lack of any U.S. or non-Chinese suppliers of certain components, the need to import specialized forms of the merchandise that are not reasonably available from other sources (such as material made with dedicated tools and dies), a national security interest in the use of the product imported from China, the support of large downstream U.S. value added by the Chinese imports, the support of a large amount of downstream product exports, the lack of any connection of the particular Chinese imports with any of the alleged Chinese intellectual property intrusions, that the particular imports are not “strategically important or related to the ‘Made in China 2025,’” or any demonstrable economic hardship flowing from the tariffs, particular for small- and medium-sized firms.
Coping with the Section 301 Tariffs
In addition to looking for opportunities to request a section 301 exclusion, or to comment on the latest round of tariffs, automotive-sector companies should consider evaluating these trade strategies to mute the impact of these tariffs:
- Evaluate When Acting As Importer of Record. Although the section 301 tariffs are aimed at Chinese manufacturers, the duties imposed actually are collected from the importer of record as a percentage of the ad valorem value of each entry of the subject merchandise. Companies need to be aware of contractual arrangements where they have agreed to be the importer of record or have agreed to reimburse for the payment of any Customs duties.
- Establish Contingency Measures in Long-Term Supply Agreements. Companies highly reliant on imported goods need to evaluate whether their long-term contracts cover the contingency of which party acts as the importer of record, the delivery terms (terms of delivery like CIF and FOB can impact who is responsible for paying for duties), whether reimbursement of duties occurs, whether the possibility of increasing tariffs is even addressed, and whether the parties have the right to terminate the contract based upon the imposition of unanticipated duties.
- Check Entries Carefully Against the Three Tariff Lists. The new procedures announced by Customs depend upon self-classification of goods under the new section 301 rules. Failure to properly declare the new tariff classification where required will result in both a back-bill for the duties owed (and any interest), but also additional penalties. Relying on customs brokers or freight forwarders to handle the new duties without oversight often can be inadequate, as these third parties generally are not given the responsibility of knowing what products are planned for importation. Once the goods have reached the customs territory of the United States, it is too late to do anything because the duties become owed upon entry.
- Know the Correct Classification of Entries. Section 301 duties are imposed based upon the HTS tariff line. Thus, the liability for duties pre-supposes and accurate HTS classification. In any situation where entries are in a gray area, special attention should be paid to get the classification correct and determine whether the good falls within the scope of the order. Some orders have complicated scopes that can make classification, such as the aluminum extrusions order (which is the subject of approximately eighty scope determinations by the DOC). If certainty is not possible through self-classification, importers should consider filing a request for an advisory opinion to get a binding ruling from Customs.
- Be Aware of Potential Circumvention Red Flags. Because duty rates can be high, some less scrupulous exporters will misclassify their goods, such as by claiming different product attributes or classifications than in fact exist, by claiming an erroneous country of origin, or otherwise. Any importer noticing red flags that indicate potential circumvention should check into it before CBP does.
- Conduct a Risk Assessment Review of Critical Supply Contracts that May Be Impacted. Work with the company’s sales and procurement teams to identify key long-term contracts and purchase orders that will be impacted by the new section 301 tariffs. Specific contract terms that should be examined include provisions that pertain to: (a) raw materials increases and any applicable pricing formulas; (b) other requests for cost increases; (c) force majeure; (d) notice requirements; and (e) termination rights.
- Investigate Alternative Sources of Supply. As noted above, the duties are based upon the country of manufacture, not whether the products are directly exported from China. If there are alternate sources available, the company many work to line up and qualify a replacement supplier.
As with any raw materials or component cost increases, these tariffs will create many issues across the automotive-sector manufacturing supply chains. Automotive-sector companies likely will see an impact from these new tariffs, including:
- The exercise of any applicable price adjustment clauses in supply contracts;
- Unilateral demands for price increases or for price surcharges;
- Demands that consumers take over responsibility for duties, including through shifting responsibility for which company acts as the importer of record;
- Product shortages and allocation issues;
- Claims of commercial impracticability under U.C.C. § 2-615;
- Claims of force majeure and the exercise of force majeure provisions in contracts (particularly if the force majeure clause contains broad catch-all language such as “or any other events or circumstances that may affect the Company’s ability to deliver products”);
- Refusals to ship product that could trigger duties; and
- Court challenges and international arbitration actions in the case of international supply contracts.
 Office of the United States Trade Representative, “Procedures to Consider Requests for Exclusion of Particular Products from the Determination of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation,” 83 Fed. Reg. 32,181, 32,182 (July 11, 2018), https://www.gpo.gov/fdsys/pkg/FR-2018-07-11/pdf/2018-14820.pdf.