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The Section 301 and Section 232 Trade Actions: Managing the Impact of New Trade Restrictions

The first half of 2018 has seen the United States place sweeping import tariffs on steel and aluminum products, and on thousands of Chinese products. In response, China, the European Union, Canada and other countries have retaliated with tariffs of their own, focusing on U.S. agricultural and other politically sensitive sectors.

The Trump Administration justifies the tariffs as a necessary weapon to wield in support of broader trade talks between the U.S. and trading partners. But, U.S. consumers pay higher prices for the affected imported products, and U.S. businesses pay more for intermediate goods and inputs, making their end products more costly for U.S. consumers and less competitive in global markets.

The U.S. Chamber of Commerce estimates that $39 billion is needed to make U.S. industries whole as a result of the impact of the new tariffs. The Chamber’s analysis indicates that sectors requiring the most assistance are automotive ($7.6 billion), iron and steel ($4.6 billion), aluminum ($2.4 billion) and chemical ($960 million).

The Trump tariff initiative may serve to protect some U.S. companies challenged by foreign import competition. But, for other U.S. companies who depend upon imported products for customer sales or as input or components for other end products to sell in domestic and foreign markets, the tariffs can mean higher production costs and lost sales, leading to lower revenues, lost jobs, and canceled investment plans.

Understanding the recent tariff initiatives and how they affect your business will be critical to surviving what is at best an uncertain outcome to the current trade initiatives. Companies must also be mindful of options available to them to reduce the impact of the additional trade restrictions.

Section 232 Steel and Aluminum Tariffs

On April 19, 2017, the Department of Commerce initiated an investigation under Section 232 of the Trade Expansion Act of 1962 to determine the effects on national security of imports of steel. Subsequently, on April 26, 2017, Commerce initiated a companion investigation to determine the effects on the national security of imports of aluminum. Following completion of the investigations, the President imposed import duties for steel mill products (twenty-five (25) percent duties) and aluminum products (ten (10) percent duties) effective March 23, 2018. As of June 1, 2018, all countries except Argentina, Australia, Brazil, and South Korea are subject to the Section 232 duties on steel mill articles, and all countries except Argentina and Australia are subject to the Section 232 duties on aluminum articles.

Although talks between the U.S. and the European Union (EU) to address the Section 232 tariffs and EU retaliatory trade actions have been announced, the timeline for these negotiations is uncertain, as is the outcome. In the meantime, both the U.S. and EU have agreed not to place additional tariffs while negotiations are ongoing.

Section 301 Tariffs on Chinese Imports

In an investigation launched in August 2017 using Section 301 of the Trade Act of 1974, the U.S. identified several unfair Chinese trade practices injuring U.S. business, including the country's rules requiring foreign companies to hand over sensitive technology as a condition of doing business in China, state-funded acquisition of U.S. companies' intellectual property to grow its own domestic industries, and state-backed hacking of U.S. firms to obtain sensitive business information. As a result, on July 6, 2018, the U.S. imposed a twenty-five (25) percent tariff on $34 billion worth of Chinese goods.

China matched the U.S. action with retaliatory tariffs on U.S. goods, prompting the Trump Administration to propose a second list of $16 billion worth of Chinese goods potentially subject to a twenty-five (25) percent tariff. Not yet done, the Administration then announced an additional $200 billion worth of Chinese products potentially subject to a ten (10) percent duty. Reportedly, because the initial tariff actions have not moved the Chinese to change their trade policies, the White House directed the Office of the U.S. Trade Representative (USTR) to consider increasing the tariff on the third list of $200 billion worth of Chinese imports from the original ten (10) percent to twenty-five (25) percent. In addition, the President has threatened to expand the list of affected Chinese imports to $500 billion worth of products.

Dialogue between the Chinese and Americans is ongoing, but no formal round of negotiations has been scheduled. Officials decline to say when USTR might make a decision on excluding any products from the list of $16 billion in Chinese goods that is slated to be hit with a 25 percent additional duty, or for the timing of decisions on the third list of $200 billion worth of products.

Options for Companies Impacted by the Section 232 and Section 301 Tariffs

Actions are available to companies affected by the new tariffs to manage and perhaps blunt their impact.

  • Consider utilizing available waiver processes to exclude products affected by the Section  232 and Section 301 tariffs. Protocols have been established with respect to both Section 232 and 301 tariffs to apply for exclusions for specific products –

    • For the Section 232 steel and aluminum tariffs, requests can be submitted to the U.S. Department of Commerce, which will grant an exclusion if the Secretary of Commerce determines the steel or aluminum article for which the exclusion is requested is not produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality, or should be excluded based upon specific national security considerations. Only individuals or organizations using steel or aluminum articles in business activities (e.g., construction, manufacturing, or supplying steel to users) in the United States may submit exclusion requests.

    • For the Section 301 tariffs, requests for exclusion can be made to the USTR for specific products to be exempted from the duties. The exclusion process is intended to address situations that warrant excluding a particular product within a subheading of the Harmonized Tariff Schedule (HTS), but not the tariff subheading as a whole. The USTR will weigh a number of factors when considering an exclusion request, including whether the product in question is available from a source other than China and whether the new tariff would cause “severe economic harm” to the importer or other U.S. interests. Companies must submit exclusion requests before October 6, 2018. If granted, the exclusion will apply for one year, retroactive to July 6.

  • Reevaluate supply chain strategies to minimize or avoid duties.

    • Products subject to the Section 232 and Section 301 tariffs are designated by HTS Code. Companies may wish to consider opportunities to change product HTS classifications to HTS Codes not designated as subject to the tariffs. Importers should routinely review import classifications in any event in the exercise of reasonable care because classifications and/or products can change over time.

    • Consider sourcing products from a different supplier in a country not subject to the tariffs, where feasible. Tariffs that apply to one country may not apply to another.

    • Importers are obligated to pay duties only when product is imported. Deferring the timing of import events by storing product in a bonded warehouse until such time as lower duties return will avoid higher tariff exposure. After all, the new tariffs may not last long and should begin to disappear as trade agreements are reached between the U.S. and trading partners.

  • Review supply agreements. Supply agreements can incorporate many different trade terms, some of which obligate the buyer to pay import or export taxes and duties and others obligate the seller to those payments. Negotiating supply agreement terms that reduce or avoid a company’s tariff exposure, where possible, may ease the impact caused by higher tariffs.

  • Make your views about the tariffs known to the Government.

    • It is important for companies concerned about the effect of these tariffs to make their views known to their Congressional representatives and to the US Trade Representative.

    • In addition, the USTR will be holding a hearing on August 20, 2018, to hear from parties wishing to oppose or support the proposed third round of Section 301 tariffs on $200 billion worth of Chinese imports. Requests to appear at the hearing must be filed by August 13 and the deadline for written comments on the proposed tariffs has been extended until September 5.

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About this Author

James Kearney, Government Contracting Attorney, Womble Carlyle Law FIrm
Partner

Mr. Kearney represents clients in matters involving government contracting, cross-border regulatory compliance, internal investigations, and enforcement proceedings. His practice focuses on helping clients assess and manage the unique regulatory risks involved in contracting with government entities, entering into federal grant and other funding agreements, and with managing cross-border transactions and global supply chains. He is a member of the Firm’s Government Contracts Group, Global Practice Group, and Supply Chain Initiative. Mr. Kearney represents regulated...

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