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Executive summary

On 14 May 2024, the White House¹ and the United States Trade Representative (USTR) issued statements to announce imposing new or additional tariffs on US$18b of Chinese goods to further protect interests of American workers and businesses. The tariffs target strategic sectors such as steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes and medical products.

The additional tariffs were deemed necessary by the Biden-Harris Administration to curb China’s dominance in several sectors, including 80% of certain portions of EV battery supply chain as well as 80% to 90% of certain parts of the global solar supply chain.² The latest tariff action is also intended to further the Biden-Harris Administration’s efforts in supply chain resiliency and national security spearheaded by the Bipartisan Infrastructure Law, CHIPS and Science Act, and Inflation Reduction Act.

The USTR, under the direction of President Biden, will incrementally increase tariffs under Section 301 of the Trade Act of 1974 (Section 301) based on the table below:

Missing from the announcement, however, was any discussion around the exclusions set to expire at the end of May 2024.

Four-year review

The decision to increase tariffs was part of USTR’s long awaited statutory four-year review of Section 301 tariffs, which commenced in May 2022. Section 301 instructs the USTR to consider the effectiveness of the tariff actions in achieving the objective of the investigation, alternative actions, as well as the overall effects of the tariff actions on the US economy.

The report, titled “Four Year Review of Actions Taken in the Section 301 Investigation: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation,”⁴ (the Report) found that the Section 301 tariffs generally contributed to positive outcomes. These include: encouraging China to take actions to eliminate some of its technology transfer-related acts, policies and practices; increasing imports from alternative sources; and supporting US supply chain resiliency – all with small negative effects on US-aggregate economic welfare.

With these findings, the USTR supports continuing Section 301 tariffs, as well as expanding the tariffs to Chinese-origin imports from strategic sectors.

Importantly, the Report recommends:

(1) Establishing an exclusion process targeting machinery used in domestic manufacturing, including proposals for 19 exclusions of certain solar manufacturing equipment

(2) Allocating additional funds to United States Customs and Border Protection for greater enforcement of Section 301 actions

(3) Increasing collaboration and cooperation between private companies and government authorities to combat state-sponsored technology theft

(4) Continuing to assess approaches to support diversification of supply chains to enhance our own supply chain resilience

The USTR is expected to publish further instructions on the public comment period in the Federal Register as early as the week of 20 May 2024.

Actions for businesses

Any company involved in US-China trade should identify the potential impact of this additional increase in duties and explore mitigation strategies.

Immediate actions for companies involved in the strategic sectors to consider include:

• Closely monitoring and participating in any exclusion process the USTR may issue
• Reviewing tariff classifications relevant to the targeted strategic sectors, evaluating impact and taking actions for supply chain or manufacturing adjustments to mitigate potential tariffs 
• Mapping their complete, end-to-end supply chain to fully understand the extent of products impacted, potential costs, alternative sourcing options, alternative manufacturing options, including relocation of production outside of China with a focus on country-of-origin planning as a means to mitigate impact
• Identifying strategies to defer, eliminate or recover the excess duties paid under Section 301, such as bonded warehouses, Foreign Trade Zones, substitution drawback, eligible Free Trade Agreements, and Chapter 98 (Special Classification Provisions)
• Exploring strategies to reduce customs value of imported products subject to the additional duties, such as reevaluating current transfer pricing approaches, reviewing potential to bifurcate product and non-product costs, and considering First Sale for Export into the US
• Reviewing contracts with suppliers and with customers to understand who has liability for increased duties and whether there are opportunities for negotiation
• Developing compliance processes and procedures that demonstrate reasonable care in the face of increased Customs enforcement and scrutiny 
• Assessing whether US customs bonds are adequate to support the increase in tariffs

Additionally, US distributors who purchase from related parties will almost certainly have transfer prices impacted by the imposition of Section 301 duties. Along with the strategic importance of mitigating duty impact while aligning the income tax and customs approaches, affected parties should also review the mechanics for reporting any transfer pricing adjustments to US Customs. This process may be particularly complex when duties are present for only a portion of the year. US Customs has very specific rules for reporting adjustments to prices made after importation, such as transfer pricing adjustments. These rules require the importer to take specific actions before importing goods for which prices may be adjusted, including adding customs-specific language to transfer pricing policies. With proper planning, refunds may be obtained on duties paid should transfer prices be reduced.