1. The Biden Administration’s Emerging China Trade Policy
Following more than a year of reviewing its options against the backdrop of a global pandemic, disrupted supply chains, surging inflation, eroding multilateralism, trade fragmentation, economic nationalism, the failure of the Phase One Agreement, increased popular support for actions that are tough on unfair Chinese dumping and subsidies, and what is, for now, a dangerous European war, the outlines of the Biden administration’s China trade policy are slowly but surely coming into sharper focus. In contrast to Donald Trump’s “tough” approach to U.S.-China trade, the current administration’s China trade policy strives, by design, to be “tough and smart.” This distinction is reflected in United States Trade Representative (USTR) Katherine Tai’s recent remarks regarding the need for a policy that maintains pressure on China at the same time it achieves a better alignment with the strategic interests and objectives of the United States. The primary attributes of the Biden administration’s recalibrated China trade policy can be summarized as follows:
a. Strategy: Less Random, More Targeted
Unlike the manner in which the past administration imposed over $360 billion in Section 301 duties on imports of certain Chinese merchandise without fully understanding or explaining the connection between a particular article and the tariff, the current administration is moving in the direction of taking a more nuanced approach to linking Chinese products with Section 301 duties. At the heart of this shift is the notion that the U.S. can retain the leverage tariffs offer as a tool for pressuring China to reform its unfair trade practices without imposing duties on such a broad and indiscriminately defined set of goods. As Daleep Singh, a deputy national security adviser in the Biden administration recently observed in this regard, what strategic objective is advanced by having tariffs on Chinese-made bicycles or underwear? This approach, to the extent it becomes the new normal, is beneficial insofar as it allows the U.S. to be tough with respect to industries and/or products of strategic significance (solar panels, semiconductors, batteries, etc.), without causing unnecessary collateral damage to American businesses and consumers.
b. Orientation: Less Unilateral, More Collaborative
The go-it-alone, “America first” worldview of the Trump administration has, pursuant to a number of fence-mending and alliance-building initiatives, been replaced by a more collaborative approach to confronting China on trade issues. Important examples of this re-orientation include the settlement of certain Section 232 steel and aluminum disputes, the resolution of the large civil aircraft (LCA) dispute with the UK and the EU, the reconciliation of differences with the UK and various EU members over digital services taxes (DST), the development of the Indo-Pacific Economic Framework (IPEF), the establishment of the U.S.-EU Trade and Technology Council (TTC), the formation of the Australia, UK, and U.S. (AUKUS) trilateral security pact, the expansion of the Quadrilateral Security Dialogue (the Quad) group’s agenda, the realization of discussions regarding the possible integration of S. Korea, India, and Japan into the Five Eyes intelligence alliance, etc.), This shift in modus operandi is evident in the way the current administration has eschewed overreliance on domestic trade remedies (Section 301 duties being “Exhibit A” in this respect) in favor of a strategy that emphasizes the same domestic remedies alongside action undertaken in concert with like-minded allies (the EU, Japan, et al.) geared toward making WTO rules more responsive to market disruptions caused by unfair Chinese trade practices.
c. Tactics and Tools: Less One-Dimensional, More Dynamic
When it came to the execution of its China trade policy, the prior administration relied heavily, as noted above, on Section 301 tariffs. Who, in this vein, will ever forget the former president referring to himself as “tariff man”? The current administration, by way of contrast, has emphasized an “all tools on the table” approach. Consequently, instead of there being one principal arrow (i.e., Section 301 duties) in its quiver, the USTR today draws on a diversified array of arrows. Examples of the arrows now found in the administration’s quiver include the Section 301 duties associated with the 2018 investigation into Chinese policies and practices regarding technology transfer and intellectual property, the special import tariffs imposed under Section 232 of the Trade Expansion Act of 1962 and Section 201 of the Trade Act of 1974, the detention and exclusion of merchandise pursuant to the enforcement of forced labor-related Withhold Release Orders (WROs) and the recently enacted Uyghur Forced Labor Protection Act (UFLPA), the stepped-up conduction of China-related AD/CVD evasion investigations under the Enforce and Protect Act (EAPA) and circumvention inquiries under Section 781 of the Tariff Act of 1930, the Section 301 duties that could result from a possibly forthcoming USTR investigation into Chinese industrial subsidies, the exclusion orders that could flow from a possibly forthcoming International Trade Commission (ITC) investigation into Chinese IP practices under Section 337 of the Tariff Act of 1930, etc. The move away from a China trade policy focused essentially on successive tranches of Section 301 duties to one that makes use of a more expansive and flexible set of tools allows the U.S. to adapt and respond to the stream of major events that have transpired over the past years (Brexit, pandemic, war in Ukraine, inflation, etc.) while simultaneously providing the legal and administrative resources needed to counteract China’s problematic trade practices.
d. Balancing of Interests: Less Exclusive, More Inclusive
The Trump administration’s China trade policy was responsive to the interests of labor groups, U.S.-based manufacturers, and China hawks in the national security arena, but not to those of other groups. This has, over time, led to substantial frustration, uncertainty, lost opportunity, and economic hardship. The Biden administration is changing this by addressing not just the interests of labor, U.S.-based industries that need to be shielded from foreign competition, and the China hawks, but, also, those of U.S. exporters, importers, and consumers. In balancing the range of input considered by law and policy makers, U.S. chipmakers will get the protection they require at the same time a smaller set of U.S. exporters will find themselves shut out of lucrative overseas markets by retaliatory tariffs, a larger number of U.S. importers will be able to secure the foreign parts and components needed for their domestic operations, and U.S. consumers will no longer have to pay a premium for everyday goods.
2. Proof of Concept: The USTR’s Reinstatement of Previously Granted Exclusions
The USTR’s recent determination to reinstate 352 previously granted exclusions embodies the main attributes of the Biden administration’s emerging China trade policy. To begin with, it maintains pressure on China – a crucial consideration in light of Beijing’s failure to meet its purchase commitments under the Phase One Agreement – at the same time it provides relief that is better aligned with identifiable strategic objectives and/or interests (including, for example, national security, critical supply chains, emerging technologies, etc.). Second, the determination was published in tandem with the U.S. government’s announcement regarding the launch of a collaborative mechanism designed to counter China’s opportunistic trade practices – specifically, the IPEF. Third, news of the reinstatement determination coincided with the roll out of complementary legal and administrative actions that are intended to ensure America’s China trade policy is both tough and smart. Examples in this connection include the enactment of the UFLPA, the notification of the ITC’s Section 332 investigation into the impact of Section 301 duties on U.S. industry (discussed below), and the commencement of the USTR’s quadrennial review of necessity with respect to Section 301 duties on Chinese origin merchandise (also discussed below). Finally, the USTR’s decision to reinstate 352 previously granted exclusions was noteworthy for the way it took into consideration the interests of an expended set of stakeholders (e.g., importers, exporters, and consumers) – and not just those of the entities and groups that could be counted on to oppose the granting of renewed Section 301 relief (labor, U.S.-based manufacturers, China hawks, etc.). Tough. Targeted. Collaborative. Expansive. Inclusive. On balance, the Biden administration’s words and actions manifest a clear movement away from the tough, without more, nature of Donald Trump’s China trade policy.
3. China-Focused Section 301 Duties: What’s Next?
Notwithstanding the fact that the emergence of a tough yet smart China trade policy is welcome news to many in the trade community, concern lingers amongst U.S. importers, exporters, consumers, and even certain government actors with respect to the large body of China-focused Section 301 duties that do not come within the scope of the USTR’s reinstatement action. It is, in this connection, important to note that the exclusion reinstatements announced on 23 March 2022 correspond to only 16% of all previously granted China-focused Section 301 exclusions. They are, moreover, are retroactive to only 12 October 2021 (and not 1 January 2021, as had been hoped). The vast majority – approximately 84% – of previously granted Section 301 exclusions remain, in what constitutes a significant pain point for U.S. businesses and consumers, in an expired status. While the statements and actions of the USTR, coupled with China’s breaching of the Phase One Agreement and the increasingly strong nature of anti-China sentiment encountered in U.S. public opinion (which is not lost on politicians), make clear that the U.S. will not be returning to the comparatively low levels of pressure (and leverage) that characterized the pre-Trump years, there are currently a number of developments on the horizon which, depending on how they unfold, could bring Section 301 duty relief on Chinese products to U.S. importers, exporters, and consumers:
a. Pending Legislation
The first development centers on legislation currently working its way through the reconciliation process before a Congressional conference committee. The Senate’s bill, the U.S. Innovation and Competition Act (USICA), calls for the reinstatement of all expired exclusions, refunds for those Section 301 duties on products whose previously granted exclusions expired on 31 December 2020 (retroactive to 1 January 2021), and the opening up of new exclusion processes. The House version of the bill, the U.S. Competes Act, does not contain similar provisions. The Senate Republican’s recent threat to withhold support for any version of the legislation that fails to contain its Section 301-related provisions, considered in conjunction with the fact that the final legislation will ultimately need Republican votes to clear the Senate, suggests that the pro-business and -consumer terms of the USICA will serve as the foundation for what comes out of the conference committee. This outcome would, to the extent events unfold in this manner, provide substantial relief from China-focused Section 301 duties.
b. Pending Litigation
The second development that could provide U.S. importers, exporters, and consumers with tariff relief involves ongoing litigation at the U.S. Court of International Trade (CIT) focused on the additional Section 301 duties imposed on certain Chinese merchandise pursuant to the USTR’s publication of Lists 3 and 4A. In an April 2022 opinion, a three-judge panel found that although the USTR had authority under the Trade Act of 1974 to modify tariffs implemented in connection with its earlier investigation into Chinese policies and practices relating to technology transfer, intellectual property, and innovation, the agency’s failure to explain the modification rationale in the context of comments received from stakeholders left room for doubt regarding the legality of the action under the Administrative Procedures Act (APA). Against this backdrop, the CIT remanded the action to the USTR with instructions to correct the deficiencies in the agency’s record within 90 days (that is, by 30 June 2022). A favorable outcome for plaintiffs in this litigation would lead to the CIT’s vacating the tariffs and ordering the refund of Section 301 duties paid under Lists 3 and 4A. That said, such relief, were it to transpire, would likely be delayed by any appeal taken by the U.S. government.
c. Pending Administrative Scrutiny
The third development that bears on the downstream availability of relief from China-focused Section 301 duties entails the review of necessity the USTR is preparing to carry out under Section 307(c) of the Trade Act of 1974 and the approximately concurrent general fact-finding investigation the U.S. ITC has begun under Section 332 of the Tariff Act of 1930. The focus of the former review will, per 19 U.S.C. §2411, correspond to the effectiveness of Section 301 duties in achieving the USTR’s stated objectives and the effects of the Section 301 duties on the U.S. economy, including consumers. The latter investigation will, for its part, examine the economic impact of the Section 301 (as well as Section 232) duties on U.S. industry. While comments will be received from stakeholders both in favor of and in opposition to the China-focused Section 301 duties, the extensive body of evidence pointing to their (i) negative economic impacts (examples of which include higher consumer prices, lost export opportunities, supply chain disruptions, declining employment, reduced GDP, a record breaking trade deficit, a rising tide of economic nationalism) and (ii) failure to force sustained, meaningful change in Chinese trade practices or facilitate significant reshoring could lead law and policy makers to rethink their support, either in whole or in part, for these kinds of special import tariffs.
d. Rising Inflation
The final development worth paying attention to when it comes to the future of Section 301 duties flows from concerns voiced by government officials outside of the USTR’s office regarding the inflation-aggravating effect of special import tariffs. U.S. Treasury Secretary Janet Yellen’s recent remarks regarding the economic benefits to be had from cutting Section 301 duties could, in an election year dominated by a rate of inflation that has reached a 40-year high, have a larger-than-intended effect. The Peterson Institute for International Economics (PIIE), a leading think tank for trade issues, has been more specific on the nexus between trade liberalization and the overall health of the U.S. economy. To this end, a recent PIIE policy brief argues that the elimination of the tariffs imposed by the Trump Administration on China could, on a one-time basis, reduce CPI inflation by between 1.3% and 2%. As is the case with Treasury Secretary Yellen’s remarks, this kind of economic appeal to the wisdom of rethinking Section 301 tariffs will, to the potential benefit of the trade community, likely catch both the imagination and attention of politicians whose re-election prospects are tied to the economy.
4. Best Tariff Mitigation Practices in the Interim
It is encouraging to think that developments currently on the horizon could result in tariff relief for U.S. businesses and consumers. This said, however, the reality is, even after factoring in the exclusion reinstatements noted above, that the majority of the so-called “Trump Tariffs” are still in place. For businesses that cannot afford to wait for the government to sort out (i.e., compromise on) the complex mix of economic, political, and legal forces which are currently shaping the issue, several established and defensible measures can, assuming proper implementation/utilization, be taken to mitigate duty exposure and stay out of CBP’s enforcement crosshairs:
- Exclusion Eligibility: Check to see if your imported merchandise comes within the scope of a reinstated exclusion (either with respect to the HTSUS code or with respect to the HTSUS code and product description). If so, ensure your broker is claiming same on entry filings/PSCs.
- Classification Review: Review current product classifications for accuracy (using the services of a customs/trade expert, if necessary). Classification errors can give rise to a “false positive” for special import tariff liability.
- Country of Origin Analysis: Review existing country of origin determinations for accuracy (using the services of a customs/trade expert, if necessary). An improper origination analysis can, as is the case with an erroneous classification, give rise to a “false positive” for special import tariff liability.
- Operational Engineering: Evaluate whether your current production process can, with an eye to avoiding special import tariffs, be restructured so as to effect a legitimate and defensible change in the country of origin of the imported merchandise.
- Tariff Engineering: Evaluate the feasibility of making small changes in the design or manufacture of a product so as to enable it to be classified under a more advantageous HTSUS subheading/description.
- First Sale Doctrine: Explore the use of valuation techniques that, if properly implemented/documented, can reduce the overall amount of duty owed (even if your merchandise is still subject to Section 301 duties).
- Drawback: Take advantage of duty refunds that are, where merchandise imported is subsequently exported or destroyed, available pursuant to the filing of a drawback claim.
- Nearshoring/Onshoring: Consider nearshoring production operations, particularly to a country with which the U.S. has an FTA (for example, the USMCA) or Trade Preference Program for (example, the Caribbean Basin Initiative). Alternatively, if feasible, consider bringing production operations home to the U.S.
- Participate in USTR Review/ITC Investigation: Prepare and submit comments in opposition to Section 301 tariffs in the USTR review and ITC fact-finding investigation. The USTR has yet, in this connection, to announce a submission deadline for interested persons that do not benefit from the Section 301 duties. Watch this space for additional guidance, as it becomes available. On the other hand, the deadline for requesting to appear at the ITC hearing is 6 July 2022, with subsequent pre-hearing briefs and statements being due by 8 July 2022. Interested parties not appearing at the hearing have the option of submitting written comments by 24 August 2022.