USTR Concludes Its Section 301 'Necessity Review' And Increases Tariffs In Key Sectors

Key Points

• Last Tuesday, USTR announced the results of its Section 301 "necessity review." Today, USTR followed up with a Federal Register notice providing details on the further proposed modifications to the Section 301 tariffs.
• In a 193-page Report accompanying its announcement, USTR argued that China's continued acts, policies and practices related to technology transfer, intellectual property and innovation warrant the continuation and modification of the Section 301 tariffs.
• USTR has not yet indicated how it will treat the remaining product-specific exclusions, which will otherwise expire on May 31, 2024. However, USTR will create a new exclusion process that will be limited solely to certain machinery required for United States domestic manufacturing.
• In a 193-page Report accompanying its announcement, USTR argued that China's continued acts, policies and practices related to technology transfer, intellectual property and innovation warrant the continuation and modification of the Section 301 tariffs.
• USTR is accepting public comments on the proposed tariff hikes and new exclusion process until June 28, 2024. Stakeholders affected by the tariffs should strongly consider submitting comments, particularly those in the electric vehicle, battery, solar and semiconductor supply chains.

Background

On May 14, 2024, the U.S. Trade Representative (USTR) announced the results of its long-awaited "necessity review" of the Section 301 duties on products of China. USTR concluded in a 193-page Report that while the Section 301 measures have resulted in some "positive" changes to China's unfair practices relating to tech transfers and intellectual property (IP) rights, there has not been a "systematic and sustained" change in China's technology transfer-related acts, policies and practices. USTR determined that the impact of the tariffs on the U.S. economy has been minimal and that the tariffs have driven diversification and resilience in the U.S. supply chain. USTR also averred that the Section 301 tariffs "provide leverage" in resolving additional and "more aggressive" unfair practices by China that were identified during review.

Based on these conclusions, USTR recommended to the President several modifications to the tariffs. The President then directed USTR to increase tariffs in several strategic sectors, steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes and medical products. The White House simultaneously released a Fact Sheet providing additional details on the President's directions.

On May 22, 2024, USTR posted a draft Federal Register notice detailing the proposed changes and initiating a public comment process that will remain open until June 28, 2024. We summarize the proposed changes further below.

Overall, these results come more than two years after USTR initiated the review and nearly six years after the U.S. began imposing the tariffs following an investigation conducted by the Trump administration in 2017. USTR is required by statute to conduct a review of actions taken under Section 301 actions every four years. The purpose of the review is to evaluate whether the tariffs have achieved the objectives of the original investigation, specify other actions that could be taken to further these objectives, and evaluate the overall effects of the tariff actions on the U.S. economy.

However, many of the reasons cited in the President's directions to USTR have little to do with China's alleged practices that were the subject of the original Section 301 investigation and instead highlight benefits to American workers, prevention of Chinese overcapacity and alignment with other domestic policy incentives.

Section 301 Tariff Modifications

Additions and Increases

Overall, USTR has proposed the following tariff increases on categories products in strategic sectors. The Harmonized Tariff Schedule of the United States (HTSUS) codes to which the proposed increases would apply are listed in Annex A of USTR's Federal Register notice. The list includes 382 HTSUS 8-digit level subheadings, as well as 5 10-digit level statistical reporting numbers.

Otherwise, the remainder of the Section 301 tariffs will remain in place at their current levels. For items on Lists 1, 2 and 3, the current rate is 25%; for items on List 4A, the current rate is 7.5%. USTR did not recommend any decreased rates, even for non-strategic sectors or consumer products.

Exclusions

USTR has not yet explicitly addressed the future of the current product-specific exclusions. USTR's Report implied that those exclusions will expire on May 31, 2024. However, USTR officials have made remarks this week suggesting that certain exclusions may be further extended. We expect another Federal Register notice to be published soon addressing these exclusions, which number just over 400, down from a peak of thousands of exclusions near the end of the Trump administration. They apply to a broad range of goods, including some of the medical products excluded during the COVID-19 pandemic will see increased rates based on the proposals mentioned above.

USTR's notice proposed the establishment of a new exclusion process limited to machinery used in domestic manufacturing. The exclusions will be "temporary" and effective only through May 31, 2025. Procedures to request exclusions will be set out in another forthcoming Federal Register notice. Only certain HTSUS subheadings in Chapters 84 and 85 are eligible for this new process, as indicated in Annex B of USTR's notice.

USTR also proposed a set of 19 product-specific exclusions for certain solar manufacturing equipment "to support domestic production and decrease reliance on China." The proposed HTSUS subheadings are listed in Annex C of the Federal Register notice. The exclusions would be valid through May 31, 2025.

Other Recommendations

In addition to the modifications above, USTR made the following additional recommendations to Congress, other U.S. government agencies and the private sector:

• That Congress provide additional funds to Customs and Border Protection (CBP) for Section 301 tariff enforcement. USTR lauded the $200 billion CBP has collected to date, and suggested that increased enforcement is required based on evidence of corporate attempts to evade the tariffs.
• That law enforcement and intelligence agencies work with the U.S. private sector to combat Chinese cyber intrusions.
• That U.S. companies "prioritize cyber defenses, invest in the necessary infrastructure and services, and take appropriate actions to remediate vulnerabilities and prioritize strengthening cyber defenses."
• That USTR and other agencies should "continue to assess approaches to shifting supply chains away from China and enhancing the supply chain impacts of the tariffs."

Next Steps

We expect USTR to release additional Federal Register notices in the coming days regarding the fate of the existing product-specific exclusions, as well as procedures for participation in the new exclusion process for machinery.

Stakeholders affected by the modifications—particularly by the proposed tariff increases—should strongly consider engaging in the comment process. As noted above, the comment period is open until June 28, 2044. Topics for discussion could include the level of the proposed increase; the effects of the proposed increase on workers, businesses and the economy; and the timing of the proposed increases. Stakeholders could also consider commenting on broader policy matters, for example, requesting a broader exclusion process or suggesting other modifications to the tariffs. USTR has also posed a list of topics in its notice on which it would appreciate public input.

Importers of machinery and equipment eligible for the new exclusion process should consider whether to request an exclusion for their products. The dates for that comment process will be announced soon.

CBP has already been ramping up enforcement related to Section 301 duty collection, and we expect this trend may continue, particularly if Congress were to provide further funding. Importers should ensure their compliance with customs regulations, particularly related to tariff classification and country of origin. Changes to these practices could trigger scrutiny and deserve careful legal review to avoid accusations of duty evasion.

With Section 301 tariffs here to stay, Akin's team is well-positioned to assist stakeholders in drafting comments, ensuring compliance and finding opportunities for potential tariff relief.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.