Indirect Tax Alert | 11 July 2018

USTR proposes tariffs on $200b in additional Chinese goods, following $34b of tariffs made effective 6 July 2018

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Highlights

  • 25% additional tariffs implemented on $34 billion of previously determined Chinese goods effective 6 July 2018; additional tariffs on $16 billion of additional identified products pending.
  • The USTR has now proposed an additional 10% tariff on $200 billion of other goods not previously covered. The USTR also has announced a product exclusion process and issued guidance on use of special trade programs.

Executive summary

Effective 6 July 2018, the United States (US) has implemented an additional 25% duty rate to be applied on a wide range of products imported from China. The 818 tariff lines subject to the duties cover US$34 billion1 of goods imported from China annually and were published on 20 June 2018 in a Federal Register Notice.2 The list targets specific products that the US has determined benefit from orchestrated Chinese industrial policies, including the “Made in China 2025” policy, and other policies. Products on the list include information and communications technology, robotics, industrial machinery, new materials, aerospace items and automobiles, while generally avoiding consumer goods such as cellular telephones, footwear and apparel.3 

Both the United States Trade Representative (USTR) and US Customs and Border Protection (CBP) have announced details on import filing requirements, a detailed product exclusion request process and guidance on how impacted products will be treated when utilizing special trade programs such as Foreign Trade Zones (FTZs), Drawback, Chapter 98 and other Trade Preference programs. Importers will have 90 days (by 9 October 2018) to file a request for a product exclusion from the additional duties and product exclusions granted by the USTR will apply retroactively to entries made on or after 6 July 2018.

China immediately responded on 6 July 2018 by implementing 25% additional duties on an expansive and targeted list of US imports covering 545 tariff lines and $34 billion worth of imported goods from the US annually. On 10 July 2018, the USTR then, in response to China’s actions, announced that it will pursue further punitive remedies in the form of an additional 10% ad valorem duty on products of China with an annual trade value of approximately $200 billion, in addition to maintaining its proposed $16 billion action which was announced on 20 June 2018. Combined with the duties recently implemented, the additional $250 billion of duties on China products will likely impact almost half of everything that the US imported from China in 2017 based on available trade data.

Detailed discussion

Products subject to duties on 6 July 2018 and filing requirements

Products subject to additional 25% duties as of 6 July 2018 include tariff lines listed under Chapters 28, 40, 84, 85, 86, 87, 88, 89, and 90 of the Harmonized Tariff Schedule of the United States (HTSUS).

Tariff Chapter
Tariff Chapter Description
No. of Tariff Lines Listed

28

Inorganic chemicals; organic or inorganic compounds of precious metals…

1

40

Rubber and articles thereof

2

84

Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof

417

85

Electrical machinery and equipment and parts thereof…

186

86

Railway or tramway locomotives…

17

87

Vehicles other than railway or tramway rolling stock, and parts and accessories thereof

41

88

Aircraft, spacecraft, and parts thereof

15

89

Ships, boats and floating structures

10

90

Optical…measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof

129

Total Tariff Lines Listed

818

Any item falling within a subheading covered by the list of 818 tariff lines that is a product of China4 is now subject to a 25% ad valorem duty rate plus the general (Column 1) rate of duty for that particular subheading and any applicable “antidumping, countervailing, or other duties, fees, exactions and charges that apply to such products.”5 Importers must report both the correct HTSUS subheading of the imported merchandise as well as HTSUS subheading 9903.88.01 on customs entry paperwork.6

Product exclusion process

On 6 July 2018, the USTR released a Notice of Action setting out the process for requesting product-specific exclusions from the additional tariffs on Chinese products.7 Exclusion requests must specify a particular product that is classified within a HTSUS subheading based on physical characteristics that distinguish it from other products within the covered 8-digit subheading. The characteristics used to identify a product could include article dimensions, material composition or other attributes relevant to the particular subheading, but should not rely on criteria such as the identity of the producer/importer/ultimate consumer, actual or chief use, or trademarks/tradenames. Importers must also provide the applicable 10-digit HTSUS subheading for the item as well as the annual quantity and value of the Chinese-origin product that the requester purchased in each of the last three years. Only one product may be submitted per exclusion request.

All submissions must also include a rationale for the product exclusion request which address the following factors:

  • Commercial availability of the product outside of China.
  • Potential harm to the requester or other US interests if the exclusion is not granted.
  • Whether the product is strategically important or related to Beijing’s “Made in China 2025” or other industrial programs.

Requesters are permitted to submit any other information relevant to their request, including comments on CBP’s ability to administer the exclusion requested.

The exclusion process has the following important dates and features:

  • Product exclusions may be filed up until 9 October 2018, and exclusions granted by the USTR will retroactively apply to the date when the duties became effective (6 July 2018).
  • Product exclusions will be effective for one year upon the publication of the exclusion determination in the Federal Register.
  • Following public posting of the exclusion request on www.regulations.gov, the public will have 14 days to file responses in support or opposition of the request. After the close of the 14 day response period, interested persons will have an additional 7 days to reply to any responses received in support of or opposition to the request.

The USTR’s 6 July 2018 Notice of Action contains further details regarding the filing process:

  • Detailed instructions for submitting an electronic product exclusion request, including how to submit requests containing confidential business information.
  • Detailed instructions for submitting responses and replies to responses on any product exclusion requests.
  • Format and certification requirements for all submissions.

Evaluation of product exclusion requests will be conducted on a case-by-case in light of the goals of the USTR’s Section 301 investigation8 and the USTR will periodically announce its decisions on product exclusion requests.

Impact on special trade programs

CBP has released additional guidance on how covered products will be treated under various special trade programs such as FTZs, Drawback, Chapter 98 and Trade Preference Programs.9 Importers will not be able to reduce or avoid additional duties on covered products through the use of trade preference programs such as the Automotive Products Trade Act, Agreement on Trade in Civil Aircraft, Agreement on Trade in Pharmaceutical Products or other preference programs listed in General Note 3(c)(i) to the HTSUS.

Likewise, several benefits available to importers under FTZs will be restricted for subject items. Covered products, except those eligible for admission under “domestic status” as defined in 19 CFR 146.43, must be admitted in “privileged foreign status” as defined in 19 CFR 146.41. When such products are entered for consumption, the additional 25% tariffs will apply to the products.

On the other hand, FTZ restrictions do not foreclose duty deferment during the inventory holding period or duty elimination through exportation or destruction of covered products. Importers are also permitted to claim Drawback and Chapter 98 benefits on covered products when properly filed with CBP.

China’s retaliation and US response

On 6 July 2018, China responded to the US actions by implementing its own list of US goods subject to additional tariffs.10 The 545 tariff lines covering $34 billion worth of imported goods from the US annually primarily target agricultural products (approximately 500 tariff lines) such as meat, seafood, dairy, produce, nuts and grains. Alcohol, whiskey, tobacco products, cotton, gearboxes and vehicles such as electric cars, hybrid cars and small-engine vehicles are also covered.

The US proceeded with its proposed second list of 284 tariff lines covering $16 billion worth of imports from China annually, released on 20 June 2018.11 Chinese products targeted by the second wave of tariffs focus on HTSUS Chapter 39 (plastics and articles thereof), followed by Chapters 84 (machinery and mechanical appliances) and 85 (electrical machinery and equipment). The USTR is currently seeking comments on products that should be excluded from the proposed list with a submission deadline of 20 July 2018. A hearing is scheduled for 24 July 2018 with post-hearing rebuttal comments due by 31 July 2018.

China’s Ministry of Foreign Commerce stated that its first set of tariffs would be followed by another $16 billion if the US implements the second tranche of tariffs. Beijing’s second list of products will impact 114 tariff lines and targets US energy exports such as coal products, oil products and natural gas; life science-related products such as reagents and medical devices; and plastic products.

The USTR’s latest action on 10 July 2018 identifies 6,031 tariff lines for additional duties of 10% which would cover $200 billion worth of goods imported from China annually.12 Covered products fall within 81 Chapters of the HTSUS and can be found in the Annex of the USTR’s 10 July Notice. Pharmaceuticals of Chapter 30, medical devices of Chapter 90, cellular phones of Chapter 85, laptops and desktops of Chapter 84 and apparel and footwear of Chapters 61-64 are notably absent from the list. However, the list does include food, chemicals and pesticides, minerals, fabrics, hats and handbags, car parts, appliances, machines, televisions, items made from steel and aluminum, batteries, computer components and network routers, semiconductor assemblies and furniture, among others.

Tariff Chapter
Tariff Chapter Description
No. of Tariff Lines Listed

29

Organic chemicals

790

3

Fish and crustaceans, mollusks and other aquatic invertebrates

272

28

Inorganic chemicals; organic or inorganic compounds of precious metals, of rare-earth metals, of radioactive elements or of isotopes

261

52

Cotton

233

48

Paper and paperboard; articles of paper pulp, of paper or of paperboard

223

85

Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles

218

84

Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof

200

44

Wood and articles of wood; wood charcoal

180

60

Knitted or crocheted fabrics

60

65

Headgear and parts thereof

29

Remaining 71 Chapters

3,565

Total Tariff Lines Listed

6,031

The USTR is seeking public comment on the proposed list and will hold a public hearing on 20-23 August 2018. Requests to appear at the hearing must be received prior to 27 July 2018 and written comments are due by 17 August 2018. The deadline for post-hearing rebuttal comments is 30 August 2018.

China’s Ministry of Foreign Commerce responded shortly thereafter warning that China will take “firm and forceful” counter-measures which could include both quantitative (additional tariffs) and qualitative (other import restrictions) actions. On 18 June 2018, the US President stated “[i]f China increases its tariffs yet again, we will meet that action by pursuing additional tariffs on another $200 billion of goods,” which combined with previously announced actions would bring total levies to $450 billion annually, nearly all imports from China in 2017.13

Actions for businesses

Importers should review their products imported from China to confirm whether they are impacted by the final list. Those who are negatively impacted by the additional duties, including manufacturers, distributors and consumers, should map their complete, end-to-end supply chain to fully understand the extent of products impacted, potential costs, alternative sourcing options, and to assess any opportunities to mitigate impact. They should also consider filing product exclusion requests before the 90 day deadline of 9 October 2018. Companies exporting US goods to China, as well as China companies who rely on imported US goods, should likewise review their products to confirm whether they are included in China’s final list.

As is apparent from the latest US action, the situation is very much in flux. Lists of products subject to additional duties in the US or in China may change or expand. Any company involved in US/China trade is encouraged to identify the potential impact of additional duties and develop duty avoidance or mitigation strategies. Immediate actions for such companies could include:

  • Mapping their complete, end-to-end supply chain to fully understand the extent of products impacted, potential costs, alternative sourcing options, and to assess any opportunities to mitigate impact such as tariff engineering.
  • Identifying strategies to defer, eliminate, or recover the excess duties such as bonded warehouses, FTZs, substitution drawback, Chapter 98 and equivalent programs under China customs regulations.
  • Exploring strategies to minimize the customs value of imported products subject to the additional duties, re-evaluating current transfer pricing approaches, and for US imports, considering US customs strategies, such as First Sale for Export.

Endnotes

1. Currency references in this Alert are to US$.

2. 83 Federal Register 28710, 20 June 2018. See Annex A.

3. “USTR Issues Tariffs on Chinese Products in Response to Unfair Trade Practices,” 15 June 2018. See https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/june/ustr-issues-tariffs-chinese-products.

4. Additional duties only apply to products of China based on their country of origin, not country of export.

5. 83 Federal Register 28710, 20 June 2018. The Federal Register Notice lists the relevant modifications to the HTSUS which are provided in new US Note 20 to Subchapter III of Chapter 99 of the HTSUS.

6. CBP Cargo Systems Messaging Service (CSMS) #18-000419, 3 July 2018.

7. Notice of Action, Office of the USTR, Docket No. USTR-2018-0025, 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, 6 July 2018.

8. USTR Section 301 Report, 22 March 2018. See https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF.

9. CSMS #18-000409, 28 June 2018; and CSMS #18-000419, 3 July 2018. See also, 83 Federal Register 28710, 20 June 2018 and CBP website: https://www.cbp.gov/trade/programs-administration/entry-summary/section-301-trade-remedies-be-assessed-certain-products-china-effective-july-6-2018.

10. “Announcement on Imposing Tariffs on Some Goods Originating in the US,” 17 June 2018. See http://english.mofcom.gov.cn/article/newsrelease/significantnews/201806/20180602757681.shtml.

11. 83 Federal Register 28710, 20 June 2018. See Annex C.

12. Request for Comments and Notice of Public Hearing, Office of the USTR, Docket No. USTR-2018-0026, Request for Comments Concerning Proposed Modification of Action Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, 10 July 2018.

13. “Statement by the United States President Regarding Trade with China,” 18 June 2018. See https://www.whitehouse.gov/briefings-statements/statement-president-regarding-trade-china-2/.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, Chicago
  • Nathan Gollaher
    nathan.gollaher@ey.com
Ernst & Young LLP, Dallas
  • Armando Beteta
    armando.beteta@ey.com
  • Bill Methenitis
    william.methenitis@ey.com
Ernst & Young LLP, Houston
  • Michael Leightman
    michael.leightman@ey.com
  • Bryan Schillinger
    bryan.schillinger@ey.com
Ernst & Young LLP, Irvine
  • Robert Smith
    robert.smith5@ey.com
  • Todd Smith
    todd.r.smith@ey.com
Ernst & Young LLP, New York
  • Jeroen Scholten
    jeroen.scholten1@ey.com
Ernst & Young LLP, Portland
  • James Lessard-Templin
    james.lessardtemplin@ey.com
Ernst & Young LLP, San Diego
  • Lynlee Brown
    lynlee.brown@ey.com
Ernst & Young LLP, San Jose
  • Michael Heldebrand
    michael.heldebrand@ey.com
Ernst & Young LLP, Seattle
  • Dennis Forhart
    dennis.forhart@ey.com

EYG no. 010205-18Gbl