With the world becoming more interconnected and international trade ever increasing, trade dynamics and policies can become quite complex. Ongoing trade disputes between the United States and China provide evidence of this. These trade disputes stem in large part from the United States’ initiation of a Section 301 tariff investigation in 2017 and subsequent implementation of tariffs on Chinese goods.
These tariffs can have a major impact on businesses, especially those that do not know all of the ins and outs of how to navigate the Section 301 tariff process. Navigating this process can be quite difficult. But Agility can help keep you informed of these tariffs and assist you with minimizing their associated costs.
What are the Section 301 tariffs?
Because Section 301 tariffs have had a significant impact on businesses, it’s important to understand some background information on tariffs and trade barriers more generally. In this section, we explore what tariffs are as well as how and why countries put them into effect.
Background on trade barriers
A trade barrier, simply speaking, is a government-imposed restriction on international trade. There are several types of trade barriers. They include voluntary export restraints, import quotas, and tariffs. The current Section 301 tariffs are acting as a trade barrier that the United States has imposed on China.
The purpose of a trade barrier is to protect particular industries or segments of a country’s economy. For this reason, people sometimes refer to trade barriers as “trade protections.” Industries under trade protections have the opportunity to grow. But the lack of international trade stemming from such protections can also stunt economic growth elsewhere. As we will discuss below, such adverse effects of trade barriers are central to disputes between China and the United States over the Section 301 tariffs.
A tariff is a specific tax, or duty, on certain imported goods. Individuals or businesses that want to import those goods have to pay the tax to do so. This additional duty can increase government revenue. But more importantly, it increases the prices of imports and, by extension, makes foreign goods less competitive. To avoid having to pay the additional duty, suppliers may choose to acquire products domestically. This, essentially, is how tariffs can work to protect domestic industries.
There are several types of tariffs that governments can impose. Two common types are specific tariffs and ad valorem tariffs. A specific tariff adds a fixed fee to a product. An example of this would be adding a fixed fee of $500 on an imported computer part. Ad valorem tariffs add a tax that is based on the value of a product. So continuing with the previous example, an ad valorem tariff could increase the cost of the computer part by 10 percent of its value.
While tariffs can encourage domestic production in the country that imposes them, they often have a negative impact on the trade and economy of the country that they target. Because of this, countries may respond to tariffs that affect their goods by implementing their own retaliatory tariffs. Retaliatory tariffs are a way to put pressure on another country to repeal the tariffs it has put in place or to make certain trade concessions.
Historically speaking, tariffs have caused issues in international trade. When countries are quick to impose and retaliate with additional tariffs, international trade can suffer periods of decline. This is exactly what happened in the 1930s during the Great Depression.
During this period, there was a 66 percent decrease in trade worldwide as countries, notably the United States, imposed tariffs in an effort to protect domestic production. While scholars debate the exact role that tariffs played within the Great Depression, many argue that they contributed to global economic hardship by worsening international trade relations.
Since the Great Depression, countries have tended to enact tariffs much less frequently. Additionally, the World Trade Organization (WTO), which emerged in 1995, has helped to mediate trade disputes and create stability in the global economy.
Nevertheless, some trade disputes still occur. And the ongoing conflict between China and the United States is a prime example of this. Even before the COVID-19 pandemic, this trade dispute raised fears about a possible impending global recession.
Section 301 Tariffs
Much of the trade dispute between China and the United States stems from the Trump administration’s decision in August of 2017 to call the Trade Act of 1974 into action against China. Sections 301–310 of this act (which people commonly refer to as just “Section 301”) describe the legal process through which the United States is able to enforce its rights under international trade agreements and address foreign acts, policies, and practices that it deems to be unfair foreign barriers.
The Trump administration asserted that China had been conducting illicit practices for years and that past administrations did not take action. To respond to these practices, the Trump administration officially launched a Section 301 tariff investigation aimed at cracking down on the illicit practices and protecting American industries. The administration made the decision to enact such an investigation instead of the now more common practice of negotiating trade disputes through the WTO.
The Section 301 investigation identified four Chinese policies that justified economic action. These policies involved unfair licensing practices, requirements for businesses to turn over proprietary information to Chinese entities, intellectual property transfer to Chinese industries, and pressure to facilitate technology transfers from US to Chinese companies.
In the wake of the investigation, the United States initially threatened to impose a significant tariff on $250 billion worth of Chinese goods. China announced a plan to retaliate by increasing tariffs on $110 billion worth of US goods. And when the Trump administration made good on its threat to impose the tariff, China also made good on its promise to retaliate.
This proved to be the beginning of a series of back-and-forth retaliatory actions between the two countries that lasted through 2019. Because of Section 301’s close association with China in recent years, some now generally refer to the Section 301 tariffs as the “China tariff.”
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How the Section 301 tariffs process works
The United States Trade Representative (USTR), the government group that is responsible for creating and recommending trade policies to the president, was responsible for conducting the Section 301 investigation. Within one month of starting the investigation, the USTR concluded that China was using unfair practices. This paved the way for the new Section 301 tariffs and subsequent retaliatory tariffs from China, as the previous section noted.
The Section 301 tariffs target Chinese imports on a series of lists from the USTR. Items on the first list of products are closely related to the Section 301 tariff investigation’s findings. Because of the investigation’s focus on Chinese acquisition of US technologies, many of the List 1 items are industrial technologies and products. They include, for example, engines, turbines, construction machinery, farming equipment, rail locomotives, and microscopes.
As of July 2018, anyone importing goods on this list has to pay an ad valorem tax of 25 percent on the goods. Originally, there were plans for the List 1 tariff rate to increase to 30 percent in October of 2019. However, the Trump administration decided to suspend this increase due to upcoming trade talks with China.
One month after List 1 went into effect, the USTR introduced a second list of products subject to Section 301 tariffs. The tax rate on List 2 items is identical to that of List 1. Anyone importing goods from this also have to pay a 25 percent ad valorem tax.
The items on List 2 are similar to those on List 1 in many ways in that they include many industrial materials. However, List 2 is shorter than List 1 and notably includes some raw materials that List 1 did not include. These materials include, for example, silicone, petroleum, and chlorides.
In September 2018, the USTR introduced List 3 as a response to China’s decision to implement a retaliatory tariff on US goods. The tax rate on List 3 items was originally 10 percent. However, in March 2019, the tariff rate increased to 25 percent, matching that of the first and second lists.
Because List 3 was an escalating response to China’s retaliatory tariff, the items on this list are not closely related to the original Section 301 tariff investigation. Instead, they include a wide range of products, including, for example, dairy, vegetables, textiles, sewing machines, calculators, and vacuum cleaners.
Despite List 3’s goal of deterring further retaliation from China, the conflict between China and the United States continued to escalate. In May 2019, the Trump administration announced the extension of Section 301 tariffs to yet another list of goods—List 4. The intention of this fourth list was to include all Chinese exports not already listed on the previous three lists.
The USTR was going to introduce the List 4 tariffs in two parts and so split List 4 into two parts: List 4A and List 4B. The original plans for these lists, however, changed in the wake of an agreement between the United States and China in 2020. While the tariff rate for List 4A was going to start at 15 percent, the agreement reduced this rate to 7.5 percent. Furthermore, the agreement resulted in the suspension of tariffs on List 4B items altogether.
This agreement spared many consumer goods from an increased tariff rate. However, due to List 4A, the Section 301 tariffs now cover many additional products including oils, alcohol, books, and computer monitors.
Impact on businesses and industries
As the above overview of the Section 301 tariff lists suggests, these tariffs have had a significant impact on numerous industries. Especially in the wake of the USTR’s implementation of Lists 3 and 4, the diversity and sheer number of products that the tariffs cover is quite extensive. And as a result, the number of industries that the tariffs impact is likewise extensive.
Countless US businesses have been outsourcing and purchasing Chinese exports for years. Faced with these tariffs, businesses are left with the decision of either trying to absorb or avoid the costs of the tariff.
Generally, larger businesses are better able to absorb cost increases, such as those tied to the Section 301 tariffs. Due to their size, big businesses are able to operate on smaller margins. In contrast, small businesses are less well suited to absorb additional costs. As a result, they are more likely to have to pass cost increases on to consumers in the form of higher prices. Unfortunately, higher prices can deter consumers and thus impact small businesses’ bottom line.
Interestingly, the Section 301 tariffs have shined a spotlight on incoterms, the set of rules that guide domestic and international trade and facilitate the conduct of imports and exports. More specifically, they have shined a spotlight on the Delivered Duty Paid (DDP) incoterm, which identifies who is responsible for paying duties on an import upon its entry to a country.
Following the USTR’s implementation of the Section 301 tariff lists, various groups participating in global supply chains have scrambled to look at their existing supply chain contracts. Foreign manufacturers, domestic buyers, and domestic end-users have all been trying to determine who, exactly, is responsible for paying duties and taxes.
To avoid tricky contract negotiations and efforts to absorb high prices, some companies that rely on Chinese imports have sought to avoid the increased tariff costs entirely. They have done so by requesting exclusions from the tariffs. The article discusses these exclusions in the following section.
Certainly, however, not all US businesses rely on Chinese imports. As a result, the impact of the Section 301 tariffs on businesses has been uneven. Some US businesses that normally compete with Chinese imports have enjoyed benefits as a result of the tariffs. Producers of US steel, for example, have benefited from higher demand and increased prices stemming from the tariffs.
A Quick Guide to Incoterms 2020
Incoterms are a set of rules that guide domestic and international trade, facilitating the conduct of imports and exports, defining the costs, risks, and obligations of buyers and sellers in international transactions.
How Agility can help: Recommendations for navigating the Section 301 tariff process and how to apply for exclusions
As the opening of the article suggested, navigating the Section 301 tariff process can be difficult. Because of the four different lists, questions of changing rates, and possibilities of contract ambiguities, knowing exactly how the tariffs affect your business is not easy. This section, however, aims to provide you with some useful information and valuable resources for navigating this process and reducing its negative impact on your bottom line.
Searching HTS codes
An important first step in navigating the Section 301 tariff process is finding out which, if any, of the four Section 301 tariff lists your products are on. To do this, you will need your products’ Harmonized Tariff Schedule (HTS) subheading. The HTS sets the tariff rates and categories for all imported US merchandise. And it is based on the Harmonized System (HS), which is an international nomenclature for product classification.
HTS subheadings are between eight and ten digits long. You can likely get your products’ HTS subheadings from your supplier, distributer, or customs broker. However, if you are having issues locating these subheadings, you can use this online HTS search tool to search for them.
Once you have the HTS subheading for all your products, you can use this USTR search tool to determine if your products are on one of the four Section 301 tariff lists. If you find that your products are on one of the lists, you will also be able to see the tariff rate on the product, which currently will be either 25 or 7.5 percent, depending on the list.
Section 301 tariff exclusions
Even if your products were originally on one of the four Section 301 tariff lists, you may not have to pay the additional tariff rate. This is due to Section 301 tariff exclusions. In the wake of each new tariff list, there was a brief period of time during which individuals and businesses could request an exclusion for a product. Additionally, in light of the COVID-19 pandemic, the USTR opened an additional window of time for exclusion requests between March and June of 2020.
Among information on the product itself, those requesting an exclusion had to provide information justifying the product exclusion. This could include, for example, information about how the product is only available from China or how the tariff would cause serious economic harm to a business or the US population more generally. In the case of exclusions related to COVID-19, those submitting requests offered explanations of how certain products were necessary for the medical and public health response to the pandemic.
The designated periods for submitting product exclusions have all passed. However, the exclusions that the USTR has already granted are industry wide. Even if you did not apply for the exclusion, you can still benefit from it. For this reason, it is important to check to see if your products are on one of the exclusion lists. You can do so by checking the exclusion process section on the USTR web page for each Section 301 tariff list.
If your product is on one of the exclusion lists, you may be eligible to apply for a refund. If you are in the correct time frame, you can submit a request for a refund of the duties you have paid since the time the USTR granted the product exclusion. It is important to note, however, that the exclusion status of a product is not permanent. Each list of exclusions typically expires after one year. However, the USTR does consider exclusion extensions, so you may be eligible to request retroactive duty refunds for longer than one year.
Agility’s support for businesses
As the above information suggests, there are a lot of ins and outs to the Section 301 tariff process. And the fact is that this process can change at any given moment due to political, economic, and even public health developments. The USTR’s creation of an additional extension opportunity during the COVID-19 pandemic is a great case in point.
Fortunately, you do not need to know everything about the Section 301 tariff process in order to minimize the impact that the tariffs have on your business. Agility is available to help you fully understand how the Section 301 tariffs affect your business and how to take action.
We are ready to help you navigate the Section 301 tariff and exclusion process in the best possible way that takes your business’s specific needs into consideration. We can help you stay up to date on exclusions and find the best import solutions if exclusions are not available.
If you think your business has been impacted by the Section 301 tariffs, contact us, and we will help guide you through the tariff process.
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