Applicability of the tariff

As of July 6, the 25% tariff will be collected and administered by U.S. Customs and Border Protection (CBP). CBP will assess the tariff based on three criteria: (1) country of origin; (2) classification under the Harmonized Tariff Schedule of the United States (HTSUS); and (3) whether a product exclusion has been granted.

With regard to country of origin, it is important to note that the country of origin, not the country of export, determines the applicability of the tariff. For example, if a turbojet were imported into the United States from Europe, it would still be subject to the Section 301 tariff if it were manufactured in China. For a product manufactured with material and labor from multiple countries, in general, the country of origin will be the last country in which the components were “substantially transformed” into a new and different product.

With regard to classification, the only Chinese products subject to the tariff are those that are classified under one of the approximately 800 HTSUS codes published in Annex A to the USTR Notice of Action Pursuant to Section 301 (83 Fed. Reg. 28710 (June 20, 2018)). The Section 301 tariff is a 25% ad valorem duty that is in addition to the general rate of duty found in the HTSUS for the applicable subheading.

Product exclusion procedure

To address situations that warrant excluding a particular product from the 25% tariff, the USTR is implementing a product exclusion procedure with the following features:

• Eligible requestors: Product exclusion requests can be submitted by “interested persons,” which includes various parties impacted by the tariffs, such as importers, manufacturers, consumers, brokers, and trade associations representing parties impacted by the tariffs.
• Scope of exclusions: Requestors are permitted to seek exclusion for specific products within a specific subheading of the HTSUS, but not the tariff subheading as a whole (for example, a product defined by its eight-digit code, not its four-digit heading). Interested persons seeking to exclude two or more products must submit a separate request for each product (that is, one product per request). In addition, because exclusions will be made on a product basis, a particular exclusion will apply to all imports of the product, regardless of whether the importer filed a request. CBP will apply the tariff exclusions based on the product.
• Request process: To apply for a product exclusion, the requestor must submit a comment in docket number USTR-2018-0025 on regulations.gov. The comment should be accompanied by a special request form prepared by the USTR (available at ustr.gov.). The USTR has asked requestors not to attach separate cover letters and other documentation to their comment but rather to incorporate supporting information, exhibits, etc. into the request form. The deadline for all product exclusion requests is October 9, 2018.
• Among other facts, the request form should include the following information:
  • The 10-digit subheading of the HTSUS applicable to product requested for exclusion.
  • Identification of the particular product in terms of the physical characteristics (for example, dimensions, material composition, or other characteristics) that distinguish it from other products within the covered 8-digit subheading. It is not sufficient to identify the product only in terms of its producer, importer, ultimate consumer, use, trademarks, trade names, or by using criteria that cannot be made public.
  • The annual quantity and value of the Chinese-origin product that the requester purchased in each of the last three years. For trade association requestors, information should be based on members’ data. If precise annual quantity and value data are not available, an estimate with an explanation of its basis is acceptable.
  • Identification of confidential information. The USTR has established a procedure for business confidential treatment where requestors certify that disclosure of certain information (which must be marked) would endanger trade secrets or profitability, and that the information would not customarily be released to the public.
  • An explanation as to why a product exclusion is warranted (see criteria below).
• Criteria: The USTR will consider various rationales for granting a product exclusion on a case-by-case basis; however, the following criteria are the ones the USTR has highlighted:
  • Whether the particular product is available only from China. When making such a claim, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States 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.
  • In addition to the criteria that USTR has highlighted, requesters should also note whether the Section 301 tariff will place an undue burden on national security interests (for example, projects related to defense or critical infrastructure) and any other information or data that they consider relevant to an evaluation of the request.
• Response period: After a request is publicly posted on Regulations.gov, the public will have 14 days to file responses to the request for product exclusion. 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.
• Approval of exclusions: After the response period, the USTR will decide whether to grant the product exclusion request. The USTR has not imposed a deadline for making such determinations and said only that it will publish its decisions periodically in the Federal Register. Once granted, a product exclusion 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. In the event that an importer has paid the 25% tariff on an item prior to a product exclusion being granted, a refund from CBP will be available.

Recommendations 

In an effort to mitigate the impact of the Section 301 tariff, we recommend that companies take the following steps to prepare exclusion requests for each product subject to the tariff:

• Identify the number of specific, distinct products that are subject to the tariff based on country of origin and classification. Work with counsel to ensure that the classification and country of origin have been determined properly.
• For each product subject to the tariff, compile the following information:
  • A complete and detailed description of the product, including details that distinguish the particular product from other items covered by the same 8-digit subheading of the HTSUS.
  • Data to determine (or estimate) the annual value and quantity (with units) of the Chinese-origin product purchased in 2015, 2016, and 2017.
  • Information that supports the proposition that the products can only be obtained in China. If a product can be obtained outside of China, provide any information that supports the commercial necessity of obtaining the product in China, such as any unique ability of Chinese suppliers to meet demand in terms of quantity, quality, size, specifications, manufacturer qualifications, etc.
  • Specific facts that support the proposition that an additional 25% duty will cause severe economic harm to you or more generally to U.S. interests. Because generalized claims of economic burden are unlikely to be persuasive to the USTR, facts should be provided that explain the specific negative impact a 25% tariff will have on domestic prices, overall demand, production volumes, employment, industry competition, and other economic factors that could threaten your company’s economic viability and/or the industry generally.
  • Information that supports the proposition that the particular product is not related to “Made in China 2025” or other Chinese industrial programs designed to, among other things, foster technology and support industries such as: (1) advanced information technology; (2) robotics and automated machine tools; (3) aircraft and aircraft components; (4) maritime vessels and marine engineering equipment; (5) advanced rail equipment; (6) new energy vehicles; (7) electrical generation and transmission equipment; (8) agricultural machinery and equipment; (9) new materials; and (10) pharmaceuticals and advanced medical devices.

In compiling the information listed above, take note of any proprietary information or data for which confidential treatment should be sought.

How Reed Smith can help

Reed Smith’s International Trade & National Security Group has experience representing companies that are impacted by import tariffs. A global firm with offices in Shanghai, Beijing, and Washington, DC, Reed Smith is particularly well-positioned to represent your company and its trade interests before the USTR, CBP, and other agencies engaged in trade regulation.