How A Dispute Between Flooring Companies May Lead to the Invalidation of Section 301 Tariffs on All Imports from China Under List 3

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In 2018, after conducting an investigation into China’s unfair intellectual property policies and practices, the United States Trade Representative (“USTR”) imposed tariffs of up to 25% on certain U.S. imports from China pursuant to Section 301 of the Trade Act of 1974.[1] Since then, there has been much discussion on the impact of Section 301 tariffs to the automobile, tech and agricultural industries.[2] However, it is a dispute between flooring companies involving luxury vinyl tiles (“LVT”)[3] that is threatening to bring the entire scheme of Section 301 tariffs as applied to List 3 to an end.

On one side of the dispute are the U.S. LVT manufacturers (including Mohawk Industries, Inc. and Congoleum Corp.) that argue that the 25% tariff must be imposed on Chinese LVTs to boost American manufacturing. On the other are the U.S. importers (including HMTX Industries, LLC, M.S. International, Shaw Industries Group and Leadman Flooring) arguing that tariffs will cause disproportionate economic harm to the interests of U.S. flooring businesses – both large and small.[4]

The USTR initially sided with the LVT importers when, on November 13, 2019, it granted a Section 301 tariff exemption to floorcoverings (including LVTs) imported from China under HTSUS subheading 3918.10.1000. This exemption applied retroactively to September 24, 2018 and was effective until August 7, 2020.[5]

However, on August 7, 2020, the USTR changed course and did not renew the prior exemption to floorcoverings.[6] Since then, all floorcoverings, including LVTs, imported under HTSUS subheading 3918.10.1000 from China have been subjected to the additional duty of 25% ad valorem.

On September 10, 2020, three LVT importers (HMTX Industries, LLC, Halstead New England Corporation and Metroflor Corporation) filed suit seeking to invalidate Section 301 tariffs on all imports from China under List 3.[7] The Complaint, HMTX Industries LLC et al. v. United States of America et al. (“HMTX Industries”), was filed at the Court of International Trade. It is the first challenge of its kind and has the potential to significantly change the landscape of the U.S. trade war on China because, if successful, it will not only vacate Section 301 tariffs as to LVTs from China, but as to all goods under List 3 (approximately 6,000 products, $200 billion worth of goods).[8]

Plaintiffs in HMTX Industries – the LVT importers – allege that the Section 301 tariffs on goods from China under List 3 should be vacated because it violates both the Trade Act of 1974 and the Administrative Procedure Act.

As to the Trade Act of 1974 violations, the LVT importers alleged that the USTR violated section 301 of that act (19 U.S.C. § 2414) because the List 3 tariffs were untimely as they were imposed more than 12 months after the USTR initiated its investigation into China’s unfair intellectual property policies and practices. Additionally, they also allege that List 3 tariffs cannot be construed as a “modification” of the initial findings issued by the USTR because they are “untethered to the unfair intellectual property policies and practices it originally investigated,” and thus they violate section 307 of the 1974 Trade Act (19 U.S.C. § 2417).[9]

As to the Administrative Procedure Act, the LVT importers alleged three separate violations of that act. First, the USTR “failed to provide sufficient opportunity for comment, e.g., requiring interested parties to submit affirmative and rebuttal comments on the same day.” Second, the USTR “failed to consider relevant factors when making its decision, e.g., undertaking no analysis of the supposed ‘increased burden’ imposed on U.S. commerce from the unfair policies and practices that it originally investigated.” Third and finally, the USTR failed to connect the record facts to the choices it made by responding or explaining how the approximately 6,000 comments it received shaped its final promulgation of List 3.[10]

Defendants in the HMTX Industries case—the United States of America; Office of the United States Trade Representative; Robert E. Lighthizer, U.S. Trade Representative; U.S. Customs & Border Protection; and Mark A. Morgan, U.S. Customs & Border Protection Acting Commissioner, have yet to file a response to the Complaint. But, given the potential impact of the HMTX Industries case to the validity of List 3 tariffs, all companies that are currently affected by Section 301 tariffs under List 3 should closely monitor the developments of the case.

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Note:
[1] Section 301 tariffs on imports from China were promulgated in four separate lists (List 1, List 2, List 3, and List 4). Each list contains a different category of goods and took effect on a different date.
[2] See e.g., https://www.investopedia.com/industries-most-likely-to-be-impacted-by-trade-disputes-with-china-in-2019-4580508
[3] Letter from ACWJC to Ambassador Lighthizer, ACWJC Post-Hearing Rebuttal Comments (Sept. 6, 2018), https://www.regulations.gov/document?D=USTR-2018-0026-5355
[4] See e.g., id.; see also https://www.plasticsnews.com/news/us-lifts-china-tariffs-luxury-vinyl-tile-seeing-more-consumer-harm-manufacturing-gain
[5] Notice of Product Exclusions: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, 84 Fed. Reg. 61,674, 61,675 (Nov. 13, 2019).
[6] https://www.floordaily.net/flooring-news/flooring-not-included-on-ustrs-section-301-tariff-exemption-extension-list
[7] HMTX Industries LLC et al. v. United States of America et al., Court No. 20-00177 (“Complaint”); https://filehost.thompsonhine.com/uploads/USCIT_-_HMTX_Industries_LLC_et_al_v_United_States_-_Sept_2020_2ea7.pdf
[8] The potential impact of HMTX Industries LLC et al. v. United States of America et al. is even more significant when one considers that the vast majority of tariff exclusion requests that the USTR received to date were directed at goods in List 3, and only 5% of these requests were approved. https://fas.org/sgp/crs/row/IF11582.pdf
[9] Complaint, ¶ 2.
[10] Id., ¶ 3.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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