What Happened:

On May 22, 2024, the United States Trade Representative (USTR) issued a proposal (the “Proposal”) to implement new tariffs announced earlier this month by President Biden on certain items imported from China under Section 301 of the Trade Act of 1974.[1] That provision authorizes the USTR to investigate unfair trade barriers and impose measures to counteract a foreign country’s unfair or discriminatory trade practices.

The Bottom Line

New tariffs on additional products imported from China are likely to go into effect later this year. US companies that import products from China will need to evaluate their imports to determine the impact of these tariffs, and assess whether there are Sec. 301 mitigation strategies available to pursue.

The Full Story

In 2017, then-President Trump directed the USTR to investigate China under Section 301. The Trump Administration ultimately implemented four lists of Sec. 301 tariffs to apply to approximately $550 billion in products imported from China. In one of the few areas of agreement between the Trump and Biden Administrations, and signaling a continuing bipartisan, hawkish tone on Chinese trade policies, the Biden Administration continued those tariffs subject to a review by the USTR, which the USTR completed earlier this month.

As directed by President Biden, the Proposal maintains the existing four lists of Sec. 301 tariffs across a wide array of products from China, while introducing or increasing tariffs on another $18 billion of Chinese imports in the following areas:

Annex A of the Proposal lists subheadings or codes from the Harmonized Tariff Schedule of the United States (HTSUS) that specifically identify each product within these categories subject to the new tariffs.

The Proposal also provides a process for affected parties to seek temporary exclusion from the new tariffs. As directed by the President, the Proposal establishes an exclusionary process for companies to request that particular machinery used in domestic manufacturing, as well as for certain solar manufacturing equipment, be temporarily excluded from the new tariffs through May 31, 2025. The HTSUS codes for applicable domestic machinery eligible for exclusion are listed in Annex B of the Proposal, while the 19 temporary exclusions for solar manufacturing equipment are described in Annex C. This is a departure from the exclusion process established under the existing four lists of China Sec. 301 tariffs which allowed companies to petition the USTR for exclusions on a broader range of policy concerns (though the USTR granted only a small minority of those petitions).

The USTR has requested comment on a range of issues related to the proposal. Interested parties can comment on it beginning May 29, 2024, through June 28, 2024 on USTR’s comment portal. USTR plans to post questions to the docket prior to the opening of that portal.

Sec. 301 Mitigation Strategies

The China Sec. 301 tariffs are comprehensive and may be difficult to avoid—especially where China is the predominant source of an imported product. However, there are options available to mitigate, to some extent, tariff impacts.

• Product Reclassification: A more precise review of an imported product could cause it to be reclassified from an HTSUS code that is subject to Sec. 301 tariffs to one that is not. Given the breadth of the China Sec. 301 tariffs, particularly as expanded by the proposal, it is likely that a product would remain subject to tariffs even assigned a new HTSUS code. However, companies may want to reevaluate their imported products to determine whether they can be reclassified out of China Sec. 301 tariffs—particularly where those products have not been recently reviewed.
• New Sourcing: If a product cannot be reclassified, another option could be to seek to source the product domestically or from countries with lower tariff rates. This may be difficult, however, as some products, such as solar panel and battery components, are at present primarily—or even exclusively—produced in China.
• Relocating Manufacturing: Products originating in China will generally remain a “product of China” and subject to Sec. 301 tariffs even if sent to another country before entering the United States (including countries with which the United States has free trade agreements like Canada and Mexico). However, a product that is “substantially transformed” into another product adopts as its origin the country where that transformation took place. A company could potentially avoid China Sec. 301 tariffs by moving manufacturing processes abroad such that a product from China is substantially transformed before it reaches the United States. However, the legal precedence on what constitutes substantial transformation is complicated, and sometimes offers little leeway. For example, Customs and Border Protection (CBP) has determined that “solar cells . . . constitute the very essence of solar panels” and will generally remain of origin in the country where the cells are manufactured, regardless of subsequent transformation. Likewise, production benefits like those for solar and battery development under the Inflation Reduction Act could essentially require that manufacturing constituting substantial transformation occur in the United States. Thus, companies could be left to choose between receiving government incentives and paying Sec. 301 tariffs.
• Duty Drawback Program: Since the founding of the country, the government has provided entities with options to recover or avoid tariffs on products that are ultimately exported out of the United States. Under duty drawback, companies can be reimbursed for up to 99% of the duties paid on imported products that are: manufactured and then exported, unused or returned or destroyed. Drawback can even apply where exported products come from a supply line where it is hard to identify which products were made from imported inputs versus those sourced domestically. Drawback claims can be filed on tariffs paid for items that were ultimately exported within the last three years.
• Foreign Trade Zone (FTZ): Like the duty drawback, an FTZ also effectively exempts companies from tariffs on items that are exported from the US. Rather than getting a refund on tariffs, establishment of an FTZ causes a company’s facility to be treated as if it were not in the United States for customs purposes. If a product leaves the FTZ and enters the US, it is assessed tariffs. However, products that are instead exported are not assessed tariffs. There can also be benefits where the final product produced at the FTZ is classified differently than its inputs and potentially subject to lower tariffs. Companies generally pursue either duty drawback or FTZs. Ultimately, internal factors like scale of imports and exports will drive which option a company selects (though in certain limited circumstances, duty drawback and FTZ can complement each other).

Other Relevant Chinese Trade Measures

The new China Sec. 301 tariffs are layered on top of other trade measures aimed at China to address concerns including protecting domestic industry, national security and human rights. These include the following:

• Section 232 Steel and Aluminum Tariffs: Section 232 of the Trade Expansion Act authorizes the President to impose tariffs if the Department of Commerce (“Commerce”) determines that such imports threaten to impair the national security of the United States. In 2018, President Trump established 232 tariffs of 25% and 10%, respectively, on steel and aluminum, later expanding those tariffs to cover certain steel and aluminum derivatives. The Biden Administration has retained those tariffs, though has provided flexibility for allies in the European Union.
• Section 201 Solar Tariffs: Section 201 of the Trade Act authorizes the President to establish tariffs to provide relief to domestic industries that have been seriously injured or threatened with serious injury by increased imports. The Trump Administration first established 201 tariffs on certain solar panels from China in 2018. The Biden Administration renewed those tariffs, with certain modifications, in 2022. The current Sec. 201 tariff on applicable Chinese solar panels is 14.25%, dropping to 14% next year.
• Solar Anti-Dumping/Countervailing Duties (AD/CVD): In response to a petition by US solar manufacturer Auxin Solar, Commerce made a final determination on August 18, 2023, that certain companies across Southeast Asia were circumventing Sec. 201 solar tariffs, and, accordingly, imposed AD/CVD totaling up to 255% (specific rates available at 77 Fed. Reg. 73018 and 77 Fed. Reg. 73017). Under pressure from environmental groups, President Biden took the unprecedented step of ordering those tariffs be delayed. However, that pause will end on June 6, 2024, and Commerce has said it intends to immediately enforce the solar AD/CVD.
• Uyghur Forced Labor Prevention Act (UFLPA): Passed in 2021, the UFLPA establishes a rebuttable presumption that goods from China’s Xinjiang Uyghur Autonomous Region (XUAR) are the product of forced labor by ethnic Uyghurs. While not a tariff, the UFLPA could cause products from XUAR to be denied entry into US ports. Notably, the XUAR is a major producer of polysilicon used to produce solar panels. CBP has recently begun increasing scrutiny on the solar panel supply chain under the UFLPA.

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The International Trade Controls Team, part of the National Security Practice at Hunton Andrews Kurth LLP, will continue to monitor the development of this and other US trade control matters. Please contact us if you have any questions or would like further information regarding new developments on imports and customs, effective export control compliance programs or other questions related to US trade controls.

[1] Title III of the Trade Act of 1974 (Sections 301-310, 19 U.S.C. §§ 2411-2420), titled “Relief from Unfair Trade Practices,” is often collectively referred to as “Section 301.”