TRADE IS A TWO WAY STREET
“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 20, 1986
US CHINA TRADE WAR – AUGUST 9, 2018
This blog post will go into detail about the Section 301 China IP case, the 25% tariffs against $250 billion in imports from China and the Exclusion process in those cases.
If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address [email protected].
RECENT DEVELOPMENTS—25% ON $16 BILLION GOES INTO EFFECT ON AUGUST 23RD
In the evening of August 7th, the United States Trade Representative (“USTR”) issued its attached decision regarding the 25% tariff on imports on the second list of $16 billion in the Section 301 case on China’s unfair trade practices related to the forced transfer of American technology and intellectual property. USTR PRESS RELEASE 16 BILLION USTR OFFICIAL $16 BILLION PRESS RELEASE
There are presently three separate lists, which are attached. PRODUCTS ON $16 BILLION LIST $200 BILLION USTR NOTICEFIRST SET OF $34 BILLION Depending upon which list imports are on, different options are available.
List 1 is for the 25% tariff on the initial $34 billion in imports. If your imported product is on this list, your only option is to file a product exclusion request by October 9th.
List 2 is for the 25% on the $16 billion in imports. If your product is on that list, the 25% tariffs will take effect on August 23rd. Your only option is to file a product exclusion request sometime in the future.
List 3 is for the 25% on the $200 billion in imports. If your product is on that list, you have two chances to get the product off. Written comments are now due at the USTR on September 6th to try and pull the entire tariff item off the list. If that does not work, you can request a specific product exclusion at a due date sometime in the future.
SECTION 301 CASE OVERVIEW
To see the basis for this Section 301 case, see the attached full Section 301 report by USTR detailing the IP and Technology issues, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER. As described in detail in the full Section 301 report, the US Government firmly believes that the Chinese government has a state policy of stealing intellectual property from US companies and forcing US companies in China to transfer technology to Chinese companies and through the companies to the Chinese government.
Also see the recent testimony by USTR Lighthizer at the Senate Appropriations Committee at https://www.appropriations.senate.gov/hearings/review-of-the-funding-priorities-for-the-office-of-the-us-trade-representative. Look for the interchange between Senator Schatz of Hawaii on the Section 301 questioning the case and USTR Lighthizer’s tough response on the importance of protecting US intellectual property for future generations.
SOME QUICK POINTS
SECTION 301 TARIFFS ARE TEMPORARY
In contrast to antidumping and countervailing duty case, where antidumping and countervailing duty orders can stay in place for 5 to 30 years, tariffs in Section 301 cases are temporary. Ninety nine percent of 301 cases end up with a government to government negotiated settlement.
Am presently working with a lawyer in China, who used to work in the Chinese Government’s Ministry of Commerce (“MOFCOM”) and will be giving speeches in China because many in China “worry about the adverse impact made by 301 tariff.” When US importers move to other sources/countries of supply, many do not return to China.
THE CHINESE GOVERNMENT’S RESPONSE TO DATE DOES NOT HELP
In addition, in the attached recent article, CHINA CAUGHT OFF GUARD BY 301 CASE, the Hong Kong’s South China Morning Post reported that the Chinese government has been caught flat footed because they do not know how to handle Trump. In my experience, the Chinese government often hire Chinese consultants in China, who do not understand how the US works. That is the blind leading the blind and when that happens both often fall off a cliff.
Moreover, with its warlike rhetoric, the Chinese government is not helping. In the attached August 6th editorial entitled “China Will Not Surrender To US Threatening Tactic” in the Chinese Government People’s Daily, PEOPLES DAILY TRADE WAR, the Chinese government attacked Trump and the trade war in the Section 301 case with very warlike rhetoric:
However, both groups share the same goal: to defeat China, no matter they prefer trade war or negotiation. But there is no way for them to be satisfied.
Pointing China with gun and artillery and then asking for a talk, the US showed zero sincerity. The eye-catching economic figure released recently boosted Washington’s confidence, making the arrogant Uncle Sam unaware of where it really is before having rounds of clash with China. . . .
As a matter of fact, some American firms have already been on the brink of collapse, and the farmers are severely hurt by the trade war. . . .
China has been devoted itself to resolving disputes through dialogue. But the Chinese people no longer believe Washington’s sincerity for negotiations, which is also a lesson learned from the earlier rounds of negotiations with the latter.
See also article at the following link http://en.people.cn/n3/2018/0806/c90000-9488193.html. Please note the comments at the end of the editorial on the internet from Trump supporters responding with their own warlike rhetoric.
On August 7th, possibly in reaction to this Editorial, the USTR very quickly issued 25% tariffs on the $16 billion in imports removing only five tariff items from the list.
It should be noted that the full Section 301 report mentioned above documents past promises made by the Chinese government on the forced technology transfers, which have not been kept.
Recently, US economic reports are that despite the trade war and dark clouds on the horizon, so far the US economy is doing fine. Unemployment remains low with little inflation and the US stock market is at record highs. But the Chinese stock market has fallen 25%.
TRUMP FACES DOMESTIC PRESSURE ON TRADE BUT WILL NOT BACK DOWN
In addition, warlike Chinese articles are like waving a red flag in front of a bull (“Trump”). “Hit the Chinese now and make them take this case serious.” That may be a reason that USTR issued the list so quickly on August 7th to show that the US is not backing down either.
President Trump is not afraid and will not back down. During the Presidential campaign, Trump made clear that Chinese trade policy has to be based on reciprocity and this President keeps his promises. Many in Congress, business and in the public support his strong China trade policy on intellectual property and forced technology transfers.
On the other hand, Trump is feeling the pressure because of the upcoming mid-term elections. The Agricultural states are not happy with Trump because of the trade war. I think that is why Trump agreed so quickly to do a deal with the EC. The EC blinked but Trump blinked back. If Trump loses the midterms, there will be hell to pay.
Keep in mind, however, that Mr. Junker of the EC agreed to work with the US against China on the IP problems and forced technology transfer issues.
So the bottom line on the 301 is that there could be a settlement within the next few months. Larry Kudlow, Trump’s economic advisor, has stated that the Chinese government could settle this case in a weekend if they made a real proposal to deal with the IP and forced technology transfer issues.
Attached are comments filed on July 23, 2018 by the US China Business Council, which sets forth specific actions the Chinese Government can take to stop the trade war. US CHINA BUSINESS COUNCIL SYSTEMIC CHANGES The USCBC is advocating negotiations, not tariffs, to settle the case.
With the settlement or even when China US negotiations begin in earnest, Section 301 tariffs could be lifted. So these tariffs are not going to stay in place forever, years. I expect there will be a settlement in 6 to 8 months. But that is an estimate, like reading tea leaves to determine the future.
EXCLUSION PROCESS GOING FORWARD
In looking at the exclusion process, the key point to remember is that the deadlines in the Section 301 case to file comments requesting the exclusion of certain tariff lines for the first $34 billion and the second $16 billion in tariffs have passed. The last deadline was July 23rd to file comments to exclude tariff categories from the $16 billion target list. That means for the first two lists, the only option is to file a product exclusion request. For List 1, the product exclusion requests are due October 9th, but for List 2 the products exclusion deadline has not been set yet.
It is also important to keep in mind that Chinese companies cannot request an exclusion from the lists. The exclusion request must be made by US stakeholders, US importers and US end user customers. Thus, it is very important for Chinese companies to work closely with their US importers and US customers.
THIRD LIST 25% TARIFFS ON $200 BILLION IN IMPORTS FROM CHINA
$200 Billion Tariff Line Exclusion Request
On exclusions from the 25% tariffs on the additional $200 billion, attached is a very recent August announcement from USTR Lighthizer. FEDERAL REGISTER NOTICE EXTENDING COMMENT PERIOD SEPT 6TH LIGHTHIZER EXTENSION OF WRITTEN COMMENT PERIOD Because President Trump has decided to raise the tariffs from 10 to 25%, the deadlines have been extended on that target list. Requests to appear at the August 20th hearing are due August 13th and the deadline for written comments has been extended to September 6th.
The Section 301 notice regarding the $200 billion target list is attached, $200 BILLION USTR NOTICE. The notice specifically states that in commenting on the products in the tariff categories in the Annex attached to the notice, commentators should address:
“whether imposing increased duties on a particular product would be practicable or effective to obtain the elimination of China’s acts, policies, and practices, and whether maintaining or imposing additional duties on a particular product would cause disproportionate economic harm to U.S. interests, including small- or medium-sized businesses and consumers.”
So the question for the Chinese companies is whether the companies can work with their US customers, including US importers and customers, to develop arguments to address the specific points raised in the USTR notice for the September 6th deadline.
PRODUCT EXCLUSION REQUESTS FROM LISTS ONE AND TWO
As stated above, for products on Lists 1 and 2, companies will have a second chance to exclude individual products out of the target lists in the product exclusion process.
The Product Exclusion Process has not been put in place for List 2, but there is one in place for the first $34 billion list. The process should be the same for list 2, but we will not know the deadlines until the USTR sets up the product exclusion list for list 2.
Although the 25% tariff went into effect on July 6, 2018 for the List 1 products of $36 billion, on July 11, 2018, USTR published the attached notice, 301 EXCLUSIONS FED REG NOTICE, establishing the procedures and criteria for product-specific exclusion requests for the List 1 products. USTR’s first round of comments were focused more on the tariff subheadings in the target list, while this second round of comments gives parties a second chance to explain why their specific products should be excluded from the tariffs. The List 1 product exclusion requests are due by October 9, 2018.
List 1 Exclusion Process
Exclusion Request Conditions
USTR will accept requests from all interested US persons, including trade associations. Exclusion requests must identify a specific product with supporting data and rationale for an exclusion. And interested persons seeking an exclusion for multiple products must submit a separate request for each product.
Factors for USTR Consideration in Granting Exclusion Requests
In granting an exclusion request on a product-by-product basis, USTR will consider whether the product is available from a source outside of China, whether the additional tariffs would cause severe economic harm to the requestor or other U.S. interests, and whether the particular product is strategically important or related to Chinese industrial programs including “Made in China 2025.” USTR is unlikely to grant any exclusion requests that undermine the objective of the Section 301 investigation.
USTR will consider each request on a product-by-product basis. Exclusions will be granted on a product basis, meaning any individual exclusion should apply to all imports of that particular product (not just to products imported by the requestor).
Exclusion Request Schedule for List 1.
The USTR notice for list 1 provides:
- Product exclusion requests are to be filed by no later than October 9, 2018.
- Following public posting of the filed request (in docket number USTR–2018–0025-0001 on www.regulations.gov) the public will have 14 days to file responses to the product exclusion.
- At the close of the 14-day response period, any replies responses are due within 7-days.
- Any exclusions granted will be effective for one year upon the publication of the exclusion determination in the Federal Register, and will apply retroactively to July 6, 2018.
The schedule for product exclusion requests for the $16 billion in List 2 will be similar to the schedule for List 1.
Making Exclusion Requests – Requirements
The USTR notice provides that each request must include material set out in the bullet-point summaries listed below. See the attached Product Exclusion Process and Criteria, 301 PRODUCT EXCLUSION PROCESS AND CRITERIA.
- 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. USTR 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. USTR will not consider requests that identify the product using criteria that cannot be made available to the public.
- The 10 digit subheading of the HTSUS applicable to the particular product requested for exclusion.
- Requesters also may submit information on the ability of U.S. Customs and Border Protection to administer the exclusion.
- Requesters must provide the annual quantity and value of the Chinese-origin product that the requester purchased in each of the last three years. If precise annual quantity and value information are not available, USTR will accept an estimate with justification.
Exclusion requests 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.
- Requesters may also provide any other information or data that they consider relevant to an evaluation of the request.
All exclusion requests must be accompanied by a certification that the information submitted is complete and correct. USTR strongly encourages interested persons to submit exclusion requests on its attached prepared request form to simplify exclusion request filings.
Products that are not produced or cannot be adequately supplied by domestic producers would have a better chance at exclusion. Domestic producers have a chance to oppose any exclusion requests and likely would challenge any exclusion request for Chinese products that are competing with their products.
HOPEFULLY THE US AND CHINA WILL SETTLE THE 301 CASE LIFTING THE TARIFFS
My hope that the US and Chinese governments will negotiate and settle this 301 case so that all the tariffs are lifted. The disruption caused by Trump’s trade war is rippling through supply chains all over the US and truly hitting his agricultural supporters right between the eyes.
Although the only black mark on Trump’s economy right now is his trade war, there are recent reports that the US economy remains very strong with low unemployment and low inflation, but there are very dark clouds on the horizon.
If anyone has any questions, please feel free to contact me.