March 31, 2020
US issues additional Section 301 exclusions, China continues to provide retaliatory tariff relief, and WTO Appellate Body Alternative is reached
On 25 March 2020 and 26 March 2020, the United States (US) Trade Representative (USTR) published in two separate announcements newly granted exclusions to Chinese-origin goods subject to punitive tariffs under Section 301 of the Trade Act of 1974 (Section 301). The first set of published exclusions apply to items subject to 7.5% punitive duties on List 4A,1 covering US$115 billion2 worth of Chinese-origin goods.3 The second set of published exclusions apply to items subject to 25% punitive duties on List 3,4 covering $200 billion worth of Chinese-origin goods.5
China, on 17 February 2020, following commitments made to the US under the Phase One Trade Agreement (See EY Global Tax Alert, US and China sign Phase One Economic and Trade Agreement though tariffs remain, dated 16 January 2020) announced an exclusion process for specified goods necessary to increase China purchases from the US. The program provides exclusion of any punitive tariffs previously imposed that range from 2.5% to 25%.
In addition, it was announced on 27 March 2020 that 16 World Trade Organization (WTO) member countries, notably excluding the US, had implemented an agreement to provide an interim alternative to the now defunct Appellate Body to those countries party to the agreement.6
USTR grants new products exclusions
Following the various actions of punitive tariffs applied to Chinese-origin goods under Section 301, the USTR provided an opportunity for US stakeholders to request the exclusion of specific products classified within an 8-digit Harmonized Tariff Schedule of the US (HTSUS) subheading covered by each of the four tranches by establishing formal exclusion request processes.
After review of each exclusion request is completed, the USTR issues a denial or a grant, at its discretion, based upon specified criteria and facts presented by the submitted request. Under this process, the USTR then publishes formal determinations of all granted HTSUS numbers and product descriptions for awareness to the trade community.
On 25 March 2020, the USTR announced new product exclusions for Chinese-origin goods subject to 7.5% punitive tariffs under List 4A. The exclusions cover five 10-digit HTSUS subheadings and seven product descriptions, together covering 36 separate exclusion requests. Notable products granted exclusions in this notice include:
Notably, this round of granted exclusions covers items such as Apple watches and Fit Bits (under HTSUS 8517.62.0090), which were previously assessed Section 301 tariffs at 15% under List 4A as implemented on 1 September 2019, and later modified to 7.5% on 14 February 2020 (See EY Global Tax Alert, US and China sign Phase One Economic and Trade Agreement though tariffs remain, dated 16 January 2020).
The FRN includes a new specific 8-digit HTS code, 9903.88.44, for reporting the products now covered by the latest exclusions. The exclusions apply to goods imported from 1 September 2019 and will extend for one year to 1 September 2020.
On 26 March 2020, the USTR published in an FRN new product exclusions for Chinese-origin goods subject to 25% punitive tariffs under List 3. The exclusions cover one 10-digit HTSUS subheading, which covers one exclusion request, and 176 product descriptions, which cover 202 separate exclusion requests. Notable products granted exclusions in this notice include:
The FRN includes a new specific 8-digit HTS code, 9903.88.43, for reporting the products now covered by the latest exclusions. The exclusions apply to goods imported from 24 September 2018 and will extend to 7 August 2020.
China continues to provide retaliatory tariff relief
On 18 February 2020, China’s Customs Tariff Commission (the Commission) issued an announcement7 regarding the market-based procurement exclusion process for goods imported from the US. The goods under consideration were those goods that had been previously subject to additional duties triggered by China’s counter measures taken in response to the US Section 301 actions. The announcement provided a list of eligible goods by description of 696 distinct tariff numbers.
Products included on the list cover mainly agricultural, energy and manufactured products, which were deemed to be consistent with the scope of China’s commitment to increase procurement of US-origin goods under the Phase One agreement. The announcement provided an application mechanism for Chinese companies or enterprises within China to request a formal exclusion grant which meets the program requirements. China’s Ministry of Finance began accepting applications as of 2 March 2020. Unlike the overall US exclusion process, China’s Ministry of Finance is providing its decision on items covered by the current list to the requestor only.
Previously, the Commission has granted two rounds of product exclusions under the previously announced process covering all or part of the products classified under 81 eight-digit tariff codes.
The new market-based procurement exclusion process has notable differences with the previous process:
WTO member countries implement stop gap arbitration process
In early December 2019, terms for two of the three judges residing on the WTO Appellate Body expired, leaving the Appellate Body without the requisite three arbitrators needed to preside over cases brought to the intergovernmental organization review panel. The Appellate Body, which typically consists of seven adjudicators, has gradually decreased to three after the US repeatedly exercised its veto against the appointment of new judges over the last few years. For more information on the WTO Appellate Body disbanding, see EY TradeWatch article, WTO Appellate Body Disbands, on page 12.
In late January 2020, 17 WTO member countries issued a statement announcing that they had reached an agreement in which the countries party to the arrangement would preserve the two-step dispute settlement system at the WTO in disputes among them. The 17 WTO member countries included Australia, Brazil, Canada, China, Chile, Colombia, Costa Rica, European Union (EU)8 (presently including the United Kingdom), Guatemala, Republic of Korea, Mexico, New Zealand, Norway, Panama, Singapore, Switzerland, and Uruguay. Subsequently, South Korea and Panama dropped from the agreement, while Hong Kong joined.
On 27 March 2020, the remaining 16 members noted above put into place a Multi-party Interim Appeal Arbitration Agreement (the Agreement). The Agreement, pursuant to Article 25 of the WTO Dispute Settlement Understanding, ensures that disputes occurring among the parties will continue to benefit from a functioning dispute settlement system at the WTO level, including the option to request an independent and impartial appeal.
Notably, Canada and Mexico have signed on as part of the coalition while separately pursuing implementation of the US-Mexico-Canada Agreement (USMCA) with the US.
In a Ministerial statement published by all 16 countries party to the agreement, the intent of the agreement provides an interim framework while a resolution mechanism for current trade disputes can be formalized as a more permanent solution.9 The statement also notes the countries, “remain firmly and actively committed to resolving the impasse of the Appellate Body appointments as a matter of priority and urgency, including through necessary reform.” The Agreement is open for other countries to join, so long as the WTO Appellate Body remains defunct.
The Agreement is expected to be officially notified to the WTO in the coming weeks.
Actions for businesses
Despite the US and China reaching a Phase One agreement in January with the signing of the Economic and Trade Agreement, many tariffs on Chinese-origin goods remain in place. Any company involved in US-China trade should continue to identify the potential impact of additional duties and explore mitigation strategies. Additionally, companies should review product exclusions granted to determine if applicable to company products, as well applying for exclusions when still applicable.
Companies who conduct any form of international trade should closely monitor WTO Appellate Body updates and consider long term impacts on their business. With any action on the Appellate Body likely months, or potentially years away, the environmental volatility will likely increase as more countries will initiate unilateral actions, prompting retaliation from others. The importance of having readily available trade data to quickly assess the consequences of actions, and potential actions, remains critical to planning in this environment.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), Global Trade