Background

On 13 September 2024, the United States Trade Representative (USTR) finalized its modification of actions relative to 14 product groups as either subject to an increase in Section 301 of the Trade Act of 1974 (Section 301) tariffs or eligible for exclusions based on conclusion of its four-year review.¹ These modification actions are in response to a USTR 28 May 2024 Notice² (USTR May Notice).

The USTR May Notice specifically covered 382 Harmonized Tariff Schedule of the United States (HTSUS) subheadings and 14 product groups with an approximate annual trade value of US$18b, including steel and aluminum, semiconductors, electric vehicles (EV), batteries, critical minerals, solar cells, ship-to-shore cranes and medical products. The USTR identified these sectors as targeted by China for dominance, or sectors where the United States recently made significant domestic investments that warranted economic and national security protection.

The final modification of actions are summarized as follows:

1. Increase in tariffs to take effect as soon as 27 September 2024

The USTR finalized many of the proposed modifications presented in the USTR May Notice without change. For instance, 100% duty on Chinese EVs, 50% duty on solar cells and 25% duty on steel and aluminum products, EV batteries, key minerals and permanent magnets.

Key changes from the USTR May Notice include an increase in the scope and percentage of duties of Chinese-origin solar cells and medical supplies, such as facemasks, syringes and gloves. In addition, the May Notice states that USTR would propose to increase Section 301 duty rates for polysilicon and wafers classified under the Harmonized Tariff System of the United States (HTSUS) subheadings 2804.61.00 and 3818.00.00 to 50% because "the polysilicon and wafers that are imported under these two subheadings are critical for manufacturing solar cells and semiconductors." The USTR will publish a separate notice with procedures for interested parties to provide views on increasing tariffs on these two subheadings.

In addition to those two changes, the USTR will allow for certain ship-to-shore cranes to be excluded from these duties when certain conditions have been met.³ This adjustment recognizes the need to provide exclusions when the net overall impact of the duty increase would be more harmful to the economy when alternative suppliers, domestic or non-China are not readily available.

Please review the USTR Federal Register Notice (FRN) for full details on the HTSUS subheadings as well as relevant product descriptions.⁴

For companies operating under the US Foreign Trade Zone (FTZ) program, covered products in the Notice may only be admitted into the zone under "privileged foreign status" after 12:01 a.m. EST on effective dates, 27 September 2024, 1 January 2025 and 1 January 2026.

2. Exclusions of machines used in domestic manufacturing

Similar to the final modification of actions on increases in tariffs for covered strategic products, the USTR did not make major changes to its original proposed list of exclusions, which included 312 subheadings. With the exclusions, the USTR recognizes that certain machinery and equipment required for US manufacturing is not available domestically and needs to be imported.

Addition of five subheadings for temporary exclusions

The USTR added five subheadings describing machinery used to physically alter goods in the manufacturing process to the list of exclusions.

1. 8421.21.00 (Machinery and apparatus for filtering or purifying water)
2. 8421.29.00 (Filtering or purifying machinery and apparatus for liquids, NESOI⁵)
3. 8421.39.01 (Filtering or purifying machinery and apparatus for gases, other than intake air filters or catalytic conv. for internal combustion engines)
4. 8428.70.00 (Industrial robots) and
5. 8443.19.30 (Printing machinery, NESOI).

These exclusions, however, will not apply to general equipment that is unable to physically change a good, nor to subheadings outside of Chapters 84 and 85 or subheadings that only include parts, accessories and consumables.

Please refer to Annex E of the FRN for complete list of exclusions related to machines under Chapters 84 and 85.

Adjustments to 19 temporary exclusions for solar manufacturing equipment

While the May Notice included five exclusions covering equipment used to manufacture solar cells, the USTR removed these five exclusions in the September Notice, as such equipment is available outside of China and companies could seek alternative sourcing options.

Instead, the USTR is providing exclusions for 14 types of cell and wafer equipment with a longer retroactive period effective from 1 January 2024 through 31 May 2025 to support investments in domestic productions prior to the USTR's proposed modifications. Refer to Annex B of the FRN for more details.

Actions for businesses

Companies involved in US-China trade, particularly in the EV, solar, critical metals, steel and aluminum and medical industries, should identify the potential impact of these additional increases in duties, as well as potential exclusions, and explore mitigation strategies or support to claim the exclusions, where appropriate.

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

• Closely monitoring and participating in any exclusion process the USTR provides
• 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 the company's complete, end-to-end supply chain to fully understand the extent of products affected, potential costs, alternative sourcing options and alternative manufacturing options, including relocation of specific production lines outside of China with a focus on country-of-origin planning
• Identifying strategies to defer, eliminate or recover the excess duties paid under Section 301, such as the use of bonded warehouses, Foreign Trade Zones, substitution drawback and taking advantage of 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

For companies with FTZ admissions of products covered by the Section 301 tariffs, thought should be given to the impact and timing of importing these products after the tariffs are in force.

Additionally, transfer prices of US distributors that purchase from related parties will almost certainly be 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 if transfer prices are reduced.