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May 29, 2024
2024-1096

USTR to extend most 429 Section 301 tariff exclusions through 14 June 2024 and some through 31 May 2025

The United States Trade Representative (USTR) announced in a 27 May 2024 Federal Register Notice (FRN)1 that it will extend through 14 June 2024 exclusions of 429 products (352 previously reinstated exclusions and 77 COVID-19-related exclusions), set to expire on 31 May 2024, with a 14-day transition period. Instructions to this effect were missing from a previous FRN announcing the continuation of duties under Section 301 of the Trade Act of 1974 (Section 301) and the further increase of such duties between 2024 and 2026 for certain Chinese products in the strategic sectors2 worth a total of US$18b. (Please refer to our two recent Trade Alerts3 for more detail on the potential increase in Section 301 duties.)

The FRN also estimated that more than 100 eligible product descriptions from List 1 through List 4A of Section 3014 will be granted a one-year extension, through 31 May 2025 (Annex C of FRN). The Harmonized Tariff Schedule of the United States (HTSUS) subheadings and product details can be found in Annex C p.7 of the FRN. It will be important for taxpayers to continue to monitor USTR updates as these exclusions may be revised further in early 2025.

The USTR explained that the decision to extend exclusions until 2025 for affected products stemmed from public comments on the four-year review, confidential data provided by US Customs and Border Protection as well as advice of advisory committees and the interagency Section 301 committee. Notably, the USTR found that renewing these exclusions will support efforts to shift sourcing out of China.

Explaining why the remaining exclusions were not extended beyond the 14-day transition period (see Annex D on p. 21 of the FRN), the USTR noted the absence of public comments requesting extensions for these 102 exclusions and that providing an extension could undermine progress made by domestic industry. The HTSUS subheadings and product details can be found on p. 22 in Annex D of the FRN.

Action for businesses

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

Companies with exclusions set to expire may want to consider taking immediate action, including by:

  • Closely monitoring and participating in any exclusion process the USTR may issue, which includes reviewing Annex C and D of the FRN (p.7 and p. 21, respectively) to evaluate whether previously claimed exclusions will still be in scope in the next year; if exclusions will no longer be applicable, consult with a tax or trade advisor to determine whether any of the following planning and duty mitigation strategies apply
  • Reviewing tariff classifications for applicable exclusions, evaluating the potential 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, the imposition of Section 301 duties will almost certainly impact transfer prices of US distributors that purchase from related parties. Along with the strategic importance of mitigating duty impact while aligning the income tax and customs approaches, affected parties should 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 available on duties paid should transfer prices be reduced.

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Endnotes

1 See https://ustr.gov/sites/default/files/Section%20301%20Exclusion%20Extension%20FRN.pdf.

2 These include steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes and medical products.

3 See EY Global Tax Alerts, US Biden Administration and USTR announced additional tariffs upon completion of China Section 301 review, dated 15 May 2024, and USTR publishes further guidance on impacted China-origin products subject to additional Section 301 tariffs, dated 23 May 2024 .

4 The count for exclusions eligible for extension through 2025 is provided as an estimated number only because each product description could contain several HTSUS codes eligible for exclusion.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young LLP (United States), Global Trade

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor