The Trade Act of 1974 grants the President broad powers to manage trade relationships with foreign countries. Section 301 of the act allows the President, acting through the United States Trade Representative (“USTR”), to impose retaliatory tariffs on imports from a country if the USTR determines that country’s economic conduct “is unreasonable or discriminatory and burdens or restricts United States commerce.” Before 2018, Section 301 was rarely used; when it was, it was usually to resolve minor disputes in the WTO. In 2018, however, the USTR found that Chinese conduct regarding technology transfer and intellectual property was unreasonable and burdened U.S. commerce. In response to that finding, the Trump administration invoked its Section 301 authorities to impose up to a 25% ad valorem duty on nearly two-thirds of imports from China. The USTR rolled out tariffs in four lists between July 2018 and September 2019. Since then, Section 301 has become synonymous with the strained Sino-American trade relationship.
The Section 301 tariffs on Chinese imports came with some exceptions to ensure that a policy designed to harm China didn’t unduly burden domestic business. Interested parties could petition the USTR for an exclusion on an import during set review periods for each list. If granted, the exclusion resulted in that import being temporarily exempt from the increased tariff. In evaluating exclusion petitions, the USTR considered: (1) the availability of the product in question from non-Chinese sources; (2) attempts by the importer to source that product from the United States or third countries; (3) the extent to which the imposition of Section 301 tariffs on the particular product would cause severe economic harm to the importer or other U.S. interests; and (4) the strategic importance of the product to “Made in China 2025” or other Chinese industrial programs. The exclusions were initially set to expire at the end of 2022 but have since been extended through September 30, 2023.
The USTR has complete discretion in administering the Section 301 exclusion process. In fact, it is not required to administer one at all and ceased accepting new petitions in December 2020. The Senate attempted to codify an exclusion process with Section 73001 of the United States Innovation and Competition Act of 2021 (“USICA”). Section 73001 would have amended Section 301 by mandating a statutory review process in which the USTR would evaluate petitions and grant eighteen-month exclusions subject to possible extensions. Proponents believed a statutory exclusion process would provide a necessary avenue to alleviate the burdens on American businesses and consumers caused by the Section 301 China tariffs. Detractors, however, argued that Section 73001 would allow for too many exclusions and would therefore undermine the strategic purpose the tariffs were initially intended to serve. In the end, the detractors won out, and although the USICA passed in the Senate, it was later modified and enacted as the CHIPS and Science Act in August 2022 without the Section 301 amendments.
In light of the deteriorating Sino-American political relationship, Congress is primed to pass another China competition bill this session. It is still unclear whether a statutory exclusion amendment to Section 301 will be a part of that bill, but congressional leaders such as Senate Finance Committee ranking member Mike Crapo have indicated it likely won’t be. Thus, whether or not the USTR chooses to extend the existing exclusions past September 2023 will depend largely on how hawkish the Biden administration wishes to be with China trade. It is possible, with the 2024 election approaching, that the USTR will refuse to extend exclusions as a way of bolstering the administration’s image of being tough on China. In that scenario, importers of previously excluded Chinese products would be forced to adjust their business models accordingly.
Those importers could more easily adjust to the expiration of exclusions if Congress renews and revises the Generalized System of Preferences (“GSP”) benefits program that expired in December 2020. Originally introduced in 1985 as a means of establishing mutually beneficial trade relationships with burgeoning economies, the GSP program provided non-reciprocal duty-free treatment of certain imports from qualifying developing countries. If Congress renews and revises the GSP program to cover products whose Chinese equivalents were previously excluded from Section 301 tariffs, importers could benefit substantially by making profit-driven decisions aligned with U.S. foreign policy objectives. Such a renewal would be especially effective if accompanied by a Miscellaneous Tariff Bill that removes or lowers duties on products whose Chinese equivalents are subject to Section 301 tariffs but that are difficult to source from developing countries. It is more than possible, however, that such legislation will fall victim to the same partisan gridlock that brought about the demise of Section 73001, in which case importers of Chinese goods will be forced to take other actions to account for increased costs.
Accurately predicting what Congress will do is a notoriously challenging task in which even leading experts have lackluster track records, so only time will tell what the future holds. That being said, however, what is clear is that a dynamic political environment will continue to shape United States trade policy, especially as it pertains to China. Subsequently, in order to avoid further uncertainty and instability, businesses should prepare contingencies and redundancies in their supply chains and minimize their reliance on Chinese imports to the extent possible. Furthermore, businesses should also ensure that they stay abreast with changes in the law and adjust their business models accordingly.