The trade war between the United States and China is already impacting U.S. companies and the economy at large. As an international trade lawyer for companies on both sides of the Pacific, I have a keen understanding of its effects on a range of industries as well as the steps businesses can take to seek relief from high tariffs or mitigate their economic consequences.

Effects are already being felt by companies operating within industries such as steel, aluminum, auto parts, specialty chemicals, glass products, agricultural products, bicycles, textiles, industrial products, plastics, cameras, quartz countertops and wood flooring. The list goes on to reach nearly every American business and consumer. If left unresolved, the situation threatens serious consequences that could rock the stock market.

In this new economic climate, many of my clients are tasked with changing the ways they do business or finding creative solutions to avoid tariffs.

Fox Rothschild’s International Trade Group has a deep bench of skilled attorneys who guide U.S. and international companies through the complexities of the trade war as well as the larger web of international trade laws and regulations. Our services, including antidumping and countervailing duty cases, customs/import compliance, export controls and sanctions, international anti-corruption and the Foreign Corrupt Practices Act and cross-border contracts, are honed to help clients mitigate and manage economic risks and reinforce the strength of their bottom line.

Background on the Trade War

Since June 2018, the Trump Administration has imposed tariffs – also known as duties – on more than $250 billion worth of merchandise coming from China, a figure that encompasses more than 6,000 articles of commerce and about half of all merchandise that Americans import into the United States from China.

These tariffs were imposed following an investigation conducted by the Trump Administration under Section 301 of the Trade Act of 1974 (19 U.S.C. § 2411). Section 301 authorizes the president to take action against a foreign government that violates international trade agreements or engages in conduct that is unjustified, unreasonable or discriminatory and that burdens or restricts U.S. commerce. The Administration concluded that China was engaged in numerous unfair policies and practices related to U.S. technology and intellectual property, including forcing U.S. companies to transfer technology to Chinese counterparts.

A mistaken impression persists that the Chinese producers must pay these duties or that somehow “China” is paying them. In reality, it is the U.S. companies importing the merchandise that bear the expense of the duties. And U.S. importers have only one means to recoup these added costs: passing additional expenses along to the American consumer.

In short, American consumers can expect across-the-board price increases on a wide range of commodities.

Tariffs in the Trade War Formula

U.S. tariffs on Chinese goods have been imposed in three stages. The first round, in the amount of 25 percent, went into effect on June 20, 2018 on all products that were included on what has become to be known as List 1. The second round of tariffs were also 25 percent and went into effect on August 23, 2018 and affected all products on List 2. Most recently, on September 24, 2018, the third round of tariffs in the amount of 10 percent were announced for products on List 3. As of January 1, 2019, the 10 percent duty for products on List 3 will increase to 25 percent.

The Administration worked with the Office of U.S. Trade Representative (USTR) to determine which products would be included on List 1, List 2 and List 3. The USTR adopted a process where it published in the Federal Register a “proposed” list of items that would be affected by the tariffs and requested comments from the public. The Federal Register announced that interested parties were permitted to testify and contest the inclusion of their product on a List before the so-called Section 301 committee, which is composed of representatives from many federal administrative agencies including the Commerce, State, Labor and Agriculture Departments.

More than 350 witnesses, business professionals, trade associations and small business owners came to Washington, D.C. in the summer of 2018 to testify before this multi-agency Section 301 committee. Each witness was afforded five minutes and the hearings lasted for more than 10 days cumulatively. There was compelling testimony about the broader health and economic detriments caused by duties on many essential items and safety products, such as car seats, bicycle helmets and child safety furniture.

Common themes emerged among the witnesses:

• Tariffs would force them out of business;
• Sourcing items from the United States or other countries was not economically feasible.
• U.S. consumers would bear the brunt of tariff costs, which would ultimately impact inflation and cause the stock market to decline.

Some witnesses pointed out certain absurdities that would result from imposition of the duties. For example, one company that assembles TV kits in South Carolina explained to the committee that a TV assembled in China would have no duties and a TV assembled in Mexico would have no duties, but a TV assembled in South Carolina would be subject to a 25 percent duty.

Product Exclusion Requests from High Tariffs

The USTR has established a process by which companies can request the exclusion of their particular product from tariffs. If these requests are granted, then the company will receive a refund of any duties paid, and will not pay the tariffs going forward. However, companies should note the deadlines for requesting relief for their product on a particular List.

Although the October 9 deadline for List 1 has passed, there remains ample time to file requests for exclusion from List 2 by the December 18 deadline. As for List 3, stay tuned; the Administration has not yet established an exclusion request process, but some members of Congress are putting pressure on the Office of the U.S. Trade Representative to establish one.

Many members of Congress are putting pressure on the USTR to establish an exclusion process for List 3 as soon as possible. Companies are eager for answers as the tariffs for List 3 items will increase from 10 to 25 percent on January 1, 2019.

Exclusion Request Process

Exclusion requests must identify a specific product and include supporting data and rationale for its exclusion from tariffs. Those seeking an exclusion for multiple products must submit a separate request for each particular product. A foreign entity cannot request an exclusion.

The USTR considers the following factors when evaluating exclusion requests:

1. Whether the product is available from a source outside of China
2. Whether the additional tariffs would cause severe economic harm to the requester or other U.S. interests
3. Whether the particular product is strategically important or related to the “Made in China 2025” industrial program, which is a Chinese strategic plan to significantly upgrade its manufacturing on the industrial value chain

The USTR’s process for reviewing exclusion requests is divided into four stages:

1. Public comment – parties have 14 days to oppose a request and then the filing party has 7 days to respond to the opposition
2. Substantive review – establishes whether the product can be sourced outside of China and whether the tariff will cause significant harm
3. Administrative feasibility – considers how U.S. Customs and Border Protection can apply and enforce the exemption
4. Application and process

Successful candidates must clear all four steps. To date, thousands of requests for exclusion have been filed and many more will surely be filed as deadlines approach. None have yet been granted, but hundreds have been denied. It appears nearly certain that products that are not produced in the U.S. or cannot be adequately supplied by U.S. sources have the best chance at exclusion.

Looking Ahead

According to the Administration’s trade demands, Chinese leaders must take “swift action to end their country’s unfair trade practices, especially with regard to intellectual property.” China’s response emphasizes that it will not negotiate with a “gun pointed to its head.” On September 24, 2018, the Chinese government announced retaliatory measures, imposing tariffs on $60 billion in imports from the U.S. and creating potential for an even greater escalation of this trade war. In response, Trump has threatened to place tariffs on all merchandise coming from China.

China has not made a proposal to deal with the core intellectual property issue of forced technology transfers, which are Chinese administrative rules forcing foreign companies to share business technologies with Chinese state-run or state-directed partners in order to access the region’s markets. It appears the parties are still very far from reaching any solutions.

Experts forecast that the Trump Administration is not going to back down, despite that 700,000 jobs may be lost during this international dispute and companies on both sides of the Pacific are hurting. The trade war cannot continue indefinitely, but the United States appears to have the edge because more Chinese imports enter the U.S. than U.S. imports enter China. Ultimately, China will likely have to make some concessions on intellectual property issues.

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