For the last three or so months, our China lawyers have been confronted with a host of legal issues related to the coronavirus. This should not be surprising because China was the seminal coronavirus epicenter. For the past two months or so, our Seattle lawyers have been working on a host of legal issues related to the coronavirus. This too should not be surprising because Seattle is the United States’ coronavirus epicenter. For the past month or so, all this has become true for our Spain lawyers as well, as Spain too became an epicenter and last week went into a full lockdown. Our California and Oregon lawyers have also in the past few months been hit with a slew of coronavirus related legal matters.
The coronavirus does not discriminate, though sadly, people do. See Do Not Blame Chinese People for the Coronavirus. No Exceptions. The coronavirus has and will continue to impacts all societies and economies and this has meant our law firm has been seeing and dealing with the same sort of legal issues in all the countries in which we work. This sameness of legal issues around the world has led us to create a cross-border legal team out of the United States, China and Spain to assist companies with their legal issues arising from or related to the coronavirus. This multi-disciplinary and multi-jurisdictional team is using the knowledge and experience our lawyers have gained in one jurisdiction to determine best practices in the other jurisdictions.
In this series of posts, we have been discussing the legal issues our lawyers in China, the United States, and Spain have been confronting, with the goal of making this blog a repository of information on coronavirus law and especially on how to handle legal matters that have arisen due to the coronavirus.
In Part 1, we focused on employment law issues because those were the first issues we saw and those are the issues that continue to arise most often. In Part 2, we looked at force majeure “in real life.” In this part 3, we look at how the coronavirus is impacting tariffs and duties in the short term and how it will likely impact tariffs and duties and global trade going forward.
The coronavirus crisis has triggered increasingly loud calls in for lifting U.S. tariffs on steel and aluminum under Section 232 and on various other Chinese imports covered by Section 301. Many are worried the coronavirus is the proverbial straw that breaks many U.S. companies already struggling with the extra burden of the steel/aluminum and China tariffs. Lifting the tariffs on Chinese products in particular would give immediate relief to U.S. companies that have not been able to find alternative supply sources outside of China and are stuck with paying some, if not all, of the tariff bill on the Chinese products. See Who Pays the Tariffs on China Imports? President Trump vs. CNN and What YOU Can do NOW to Reduce Your China Prices.
Short of getting lifting the tariffs entirely, companies can petition the United States Trade Representative (USTR0 to lift specific tariffs via exclusion requests. So where are we with all these exclusion requests and what can your company still do to get your tariffs removed by using the tariff exclusion process?
USTR has announced four lists or tranches of tariffs on Chinese imports that were rolled out in intervals and went into effect starting in July 2018. Though the deadlines to submit exclusion requests for Section 301 tariffs for all lists of Chinese products have already passed, USTR is still reviewing many already-filed exclusion requests. So far, the Section 301 tariff exclusion request process has resulted in the USTR granting a good number of limited exclusions.
For the List 1 and 2 products (25% on $34 billion and $16 billion of goods), about 34% and 37% of the nearly 14,000 exclusion requests were granted and a handful of these requests still remain to be decided. Meanwhile, for List 3 (25% on $200 billion), the USTR has granted only around 1.3% of over 30,000 exclusion requests. Though the deadline for submitting these requests has also closed, as of about six months ago on September 30, 2019, nearly 60% of the List 3 exclusion requests are still pending review and we that percentage is probably not all that different today. The deadline for List 4A exclusion requests (7.5% on $120 billion) just closed on January 31, 2020. As noted below, USTR has already granted some exclusions from this list, but it seems the exclusion rate for List 4A product will be as low as for List 3.
One possible reason for the astoundingly sharp drop-off in exclusion rates is that List 1 and 2 mainly covered intermediate inputs (e.g., chemicals, engine and machinery parts) used by U.S. companies to manufacture other goods here in the United States, whereas List 3 and 4A covered far more consumer goods that were just imported and resold to U.S. distributors, retailers, and consumers. USTR was perhaps more sympathetic to exclusion requests from U.S. manufacturers who explained how their ability to produce goods in the United States would be compromised if the tariffs cut off their access to Chinese-origin inputs. In contrast, USTR seems to view consumer goods as something that could or should be fairly readily available from U.S. or third-country (non-China) sources, and thus far less willing to grant exclusions for List 3 and 4A products. List 4A products is getting few exclusions because the tariff rate on these has already been reduced from 15% to 7.5% by the Phase One Trade deal, so USTR likely considers these products as already having received a break and thus not in need off additional exclusions.
Another frustration with the Section 301 exclusion request process is the utter lack of transparency on how USTR decides whether to grant or deny an exclusion request. Describing the process as “opaque”, NBC News offered some examples of USTR’s decisions that are baffling observers.
For example, one company’s request for an exemption on metal dog crates was granted — but an almost identical product was denied … A single-speed bike received a tariff waiver, while a multi-speed bike by another company was denied.
Similarly, USTR granted a company’s exclusion request for curved-blade kayak paddles, but rejected exclusion requests from the same company for spoon-blade kayak paddles or stand-up paddles.
USTR’s exclusion letters — both rejections and grants — merely announce their thumbs-up or -down conclusion without providing any explanation or analysis of the facts presented. Despite many exclusion requests providing detailed explanations with supporting documentation why their products were not available from the U.S., or any third-country sources, USTR summarily concluded that the products were available but provided no factual basis for their decision. Similarly, many company’s heartfelt pleas for relief from the economic burden of the tariffs were met with cold responses from USTR concluding that the tariffs would not cause severe economic harm to the company or to any other U.S. interest.
Because USTR’s exclusion decision making process is so opaque and appears to be made in a black box, many speculate that political influence is more important than any factual basis. The timing of President Trump’s tweets regarding Apple, and the exclusion requests submitted and granted for Apple products, can hardly be considered a coincidence.
Trump even suggested last month that any waiver Apple has received should compel the company to offer further assistance to federal investigators seeking ‘back-door’ access to iPhones used by criminals. ‘I’ve given them waivers, because it’s a great company,’ Trump told CNBC in an interview at the World Economic Forum in Davos, Switzerland. ‘Apple has to help us.’
At the same time, however, the fact that Apple still has numerous exclusion requests still pending for products such as AirPod headphones and HomePod smart speakers suggests that even Apple’s significant political pressure has only achieved limited success through this exclusion request process.
Perhaps the only good thing about this incredibly flawed Section 301 exclusion request process is that the exclusions granted are not limited to only the company that requested them. Any other company with a product that fits the description listed in USTR’s exclusion notice may be eligible for refunds of the Section 301 tariffs even if they did not submit an exclusion request, or even if their own exclusion request was denied. USTR specifically states that the exclusions granted apply to the products listed and are not tied to any specific company or any specific product description from the underlying exclusion request. Some companies may prefer to have the exclusions apply only to them and would rather not have others free-ride off their work to prepare and submit the exclusion request. But given the randomness of USTR’s decision-making process and the limited exclusions being granted, it seems that sharing the benefits of the tiny handful of exclusions being granted is the right thing to do. So, even if USTR has already rejected your specific exclusion request, you should still closely monitor USTR’s exclusion notices because you could still benefit from USTR granting another company’s exclusion request if that product is similar enough to yours.
As we noted in a prior post, Get Your China Tariff Refund Now,
Products that were granted exclusions are now eligible for a refund of the tariffs paid as far back as the initial implementation of the tariffs. In other words, you could be owed a lot of money, but to get it, you need to properly ask for it.
USTR continues to issue a steady trickle of exclusions granted for the Section 301 China products. The latest round of exclusions was granted on March 10 and March 16 for products on List 3 and List 4A. Many of these recently excluded products include a variety of medical products imported from China, including face masks, hand sanitizing wipes and examination gloves. It appears that USTR has expedited the review and granting of these exclusion requests in just over a month after they were submitted because they could directly and immediately help first responders fight the spreading coronavirus outbreak. In this respect the coronavirus is leading to the USTR becoming more liberal in granting exclusion requests.
Though the need to grant exclusions for medical and health safety products is particularly urgent, the need to grant exclusions for other products needed by American companies to stay economically viable should also be considered just as urgent. Arguably, the Section 301 tariffs created enough pressure to get China to agree to the Phase One deal that theoretically will cause China to change its wicked IP ways. But now that the tariffs have helped move China, the U.S. should reconsider the harmful effects the tariffs likely will have on a currently reeling U.S. economy and whether they are still necessary. Because of the extenuating circumstances caused by the coronavirus crisis, USTR also has an opportunity to reconsider reversing any of its prior decisions to reject exclusion requests. Given how quickly the coronavirus is causing the shut down of economic activity in the United States, USTR should act quickly and decisively to not just suspend, but to refund tariffs on some or all Chinese goods to give more U.S. companies a fighting chance to survive. And if it would make the USTR feel any better, China’s economy did horribly in January and February and with the coronavirus crushing demand worldwide, there is no recovery in sight.
All this means that the coronavirus is more likely to lead to a short-term reduction in tariffs in both the United States and worldwide. Long term, however, the coronavirus is likely to have the opposite impact.
A Foreign Affairs article, Will the Coronavirus End Globalization as We Know It? discusses what the coronavirus has taught the world about globalized supply chains, and as most of you would probably guess, those lessons have not been pretty:
The lesson is that globalization is fragile, despite or even because of its benefits. For decades, individual firms’ relentless efforts to eliminate redundancy generated unprecedented wealth. But these efforts also reduced the amount of unused resources—what economists refer to as “slack”—in the global economy as a whole. In normal times, firms often see slack as a measure of idle, or even squandered, productive capacity. But too little slack makes the broader system brittle in times of crisis, eliminating critical fail-safes.
Lack of fail-safe manufacturing alternatives can cause supply chains to break down, as they have in some medical and health-related sectors as a result of the new coronavirus. Producers of vital medical supplies have been overwhelmed by a surge in global demand, pitting countries against one another in a competition for resources. The outcome has been a shift in power dynamics among major world economies, with those that are well prepared to combat the new virus either hoarding resources for themselves or assisting those that are not—and expanding their influence on the global stage as a result.
Products like surgical masks and medicines glaringly highlight the price the United States and Europe are paying for having offloaded so much of their manufacturing to China. Both the United States and Europe are low on surgical masks and certain medicines and China is exploiting these shortages to reward those countries that do its bidding and to punish those that don’t:
These beggar-thy-neighbor dynamics threaten to escalate as the [COVID-19] crisis deepens, choking off global supply chains for urgent medical supplies. The problem is dire for the United States, which has been late to adopt a coherent response to the pandemic and is short on many of the supplies it will need. The United States has a national stockpile of masks, but it hasn’t been replenished since 2009 and contains only a fraction of the number that could be required.
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[These shortages give] China an enormous short-term opportunity to influence the behavior of other states. Despite early mistakes that likely cost the lives of thousands of people, Beijing has learned how to fight the new virus, and it has stockpiles of equipment. These are valuable assets—and Beijing has deployed them with skill.
In early March, Italy called on other EU countries to provide emergency medical equipment as critical shortages forced its doctors to make heartbreaking decisions about which patients to try to save and which to let die. None of them responded. But China did, offering to sell ventilators, masks, protective suits, and swabs. As the China experts Rush arrangements and Julian Administration have argued, Beijing seeks to portray itself as the leader of the global fight against the new coronavirus in order to promote goodwill and expand its influence.
The United States has already responded to these medical and geopolitical threats by moving to enact legislation that will encourage the United States to re-start its manufacturing of medical products. Pharma Will be Leaving China to Come Home to the United States. And once the coronavirus starts to dissipate, we anticipate the Trump Administration — and likely the next administration as well (whoever that may be) — will take bold steps to reduce U.S. dependence on China, while concurrently striking trade deals with the UK and the EU that include mandatory product sharing arrangements in times of crisis. In other words, we anticipate a resumption more and larger tariffs and duties against Chinese products in the years to come, and not just from the United States.
Foreign Affairs nicely sums up how the coronavirus trade shocks will shape the future of global trade:
As policymakers around the world struggle to deal with the new coronavirus and its aftermath, they will have to confront the fact that the global economy doesn’t work as they thought it did. Globalization calls for an ever-increasing specialization of labor across countries, a model that creates extraordinary efficiencies but also extraordinary vulnerabilities. Shocks such as the COVID-19 pandemic reveal these vulnerabilities. Single-source providers, or regions of the world that specialize in one particular product, can create unexpected fragility in moments of crisis, causing supply chains to break down. In the coming months, many more of these vulnerabilities will be exposed.
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Unsurprisingly, President Donald Trump’s trade adviser, Peter Navarro, has used this and other shortages to threaten allies and to justify a further withdrawal from global trade, arguing that the United States needs to “bring home its manufacturing capabilities and supply chains for essential medicines.”
The coronavirus shock has rattled and changed the thinking of manufacturing companies as well. Many are calling the coronavirus “the last straw” for their doing business with China and they are scrambling to get out as soon as they can. See China’s ravaged manufacturing heartlands force international firms to speed up exit strategies. US and EU manufacturers have gone from paying lip service to diversifying their supply chain to focusing on doing so. Since the inception of the coronavirus, one of our firm’s international manufacturing lawyers often says there are now four types of companies manufacturing in China: 1) Those that desperately want to get out and are making concrete plans to do so: 2) Those that desperately want to get out and say they will start making concrete plans to do so once the coronavirus impacts have declined enough so that they have the opportunity to do so; 3) Those that desperately want to get out but realize doing so in the next couple of years is simply not possible; and 4) The smattering of companies (mostly big multinationals) that want to keep just enough of their manufacturing in China to look good to Chinese citizens that buy their products.
The coronavirus has already greatly impacted global trade and we expect that will continue for years if not decades.