US again increases tariffs on imports from China

Executive summary

Last week the United States Trade Representative (USTR) announced proposed tariff rate increases on $18 billion worth of Chinese-made products including electric vehicles (EVs), lithium-ion batteries, semiconductors, solar cells, medical supplies, and certain critical minerals and metal products. The announcement comes as the USTR concludes its long-awaited four-year statutory review of the existing Section 301 tariffs applied to $300 billion in annual trade value of Chinese imports which will remain in effect.

This week’s USTR report includes a summary Section 301 tariffs on the US economy. Since their introduction in 2018, US Customs and Border Protection (CBP) has collected more than $200 billion in Section 301 tariffs on affected imports from China. The USTR report provides a glimpse into the economic impact of one of the broadest US trade policy shifts in decades. Relying heavily on analysis contained in the 2023 US International Trade Commission (USITC) report on the economic impact of Section 301 tariffs, USTR summarized their impact on the US economy as follows:

• The decrease of imports from and exports to China have had little negative impact on US economic welfare.
• US production of products impacted by the Section 301 increased by 0.4% each year because of the elevated tariffs.
• The cost of the increased tariffs did not result in higher consumer prices in the short run.
• The increased tariffs are estimated to have decreased the value of imports from China by 13% as US importers shifted to sources in other countries in combination with increased domestic production.

Targeted imports

The table below lists the product categories that will be subject to increased tariffs from USTR’s proposed modifications to the scope and tariff levels of Section 301.

^{Source: United States Trade Representative}

The Government of China has not responded positively and promised retaliation for the latest US tariff actions. Also noteworthy is the potential response from Chinese manufacturers that have been continuing to increase investment in US and Mexican-based manufacturing facilities.

Exclusion opportunities

The USTR has also proposed the establishment of a tariff exclusion process that would apply to a broad range of machinery used in domestic manufacturing. This will enable certain machinery to be exempt from Section 301 tariffs. While procedural requirements have yet to be drafted, USTR specifically listed more than 300 machinery-related tariff lines for inclusion in the process. RSM expects that the process, once established, will be similar to the previous Section 301 exclusion process in which interested parties could petition USTR to exempt specific imported goods from Section 301 tariffs.

Additionally, USTR has proposed 19 temporary exclusions for designated solar manufacturing machinery and equipment. Use of these exclusions will not require special approval from USTR but will apply only to goods meeting narrow product descriptions. USTR did not specify a temporary validity time for these 19 exclusions.

Both exclusion proposals provide an opportunity for US manufacturers importing Chinese production machinery and equipment to avoid the increased tariffs. Likewise for other US businesses that are considering re-shoring their supply chains or investment in domestic solar manufacturing.

Recommended Actions for US Importers

Importers having a China component in their global supply chains should act to fully understand the impact of this latest US tariff action in terms of planning, compliance risks and potential mitigation strategies. Such an undertaking may include:

• Auditing customs and import operations to ensure policies, procedures and transactions are compliant in the face of increased CBP enforcement activities. Adjusting customs bond amounts to account for expected higher tariff spend and analyzing the potential impact on free trade agreement qualification (e.g., USMCA) are examples.
• Reviewing tariff classification accuracy to verify which imported products are and are not subject to Section 301 duties. Notably, even a slight change of tariff classification subheading (e.g., 7321.11 to 7321.12) can exempt a product from Section 301 tariffs.
• Assessing whether customs tariff reduction, deferral, and recovery programs such as duty drawback, bonded warehousing, foreign trade zones (FTZs) or special classification provisions may be leveraged. These can be especially valuable in cases where Chinese goods enter the US for subsequent re-export (e.g., Canada) or further stateside processing before sale.
• Determining if a shift in current customs valuation practices is warranted. For related party transactions, this may include analysis of the company’s profit margin impact, ability to pass additional duty expense on to customers and which entity within the value chain should bear any negative profit impact from the transfer pricing and tax perspectives. Planning and documentation around the transfer pricing policies applied and associated results between related Chinese manufacturers and US distributors, exploring the viability of the “first sale” concept to lower duty costs of imported merchandise or separating certain tangible and intangible cost elements of China-sourced goods are all prudent actions.
• Examining the transactional terms and structure of the current global supply chain. Such may include renegotiating supplier contract pricing and terms of sale (e.g., title transfer point) or to identify potential supplier friend-shoring and re-shoring opportunities.

RSM specializes in performing such interdisciplinary 360º cross-border activity reviews and has a proven track record of helping companies find the right solutions to complex trade matters. Our team of seasoned professionals, each with deep industry experience, can quickly assess and determine a practical path forward based on your company’s unique needs.