U.S.-China Trade Relations

The 116th Congress begins on January 3, 2019. Based on projections from yesterday’s midterms, Democrats will control the House of Representatives by a narrow margin, while Republicans will expand their hold on the Senate. The changes to Congress are likely to shape trade policy through 2019, but much will depend on how House Democrats use their new majority, and whether trade is a priority issue or whether it will be overtaken by domestic issues.

Companies will have to carefully navigate the new political environment in order to advance their policy objectives. In addition to accounting for the hard-nosed approach to trade taken by the current administration, an effective policy engagement strategy will have to account for the new political dynamics created by newly empowered House Democrats and a potentially polarized Congress. Companies should be prepared to intervene on issues that are likely to come up in 2019, including: ratification of the U.S.-Mexico-Canada Trade Agreement (USMCA); trade negotiations with the EU, Japan, and the UK; and the ongoing U.S. tariff interventions on China and for sensitive sectors.

Below is our best forecast for the makeup of the trade- and foreign affairs-related committees for the 116th Congress, and their voting record on key pieces of trade legislation:

 

NAFTA
(1994)

China PNTR
(2000)

U.S.-Colombia FTA  (2012)

Korea-U.S.-FTA (2012)

TPA**
(2015)

House Ways and Means
Chair: Richard Neal (D-Massachusetts)

Nay

Yea

Nay

Yea

Nay

Ranking Member: Kevin Brady (R-Texas)

N/A

Yea

Yea

Yea

Yea

House Foreign Affairs
Chair: Eliot Engel (D-New York)

Nay

Nay

Yea

Nay

Nay

Ranking Member: Michael McCaul (R-Texas) OR

N/A

N/A

Yea

Yea

Yea

Joe Wilson (R-South Carolina)

N/A

N/A

Yea

Nay

Yea

Senate Finance
Chair: Chuck Grassley (R-Iowa) OR

Yea

Yea

Yea

Yea

Yea

Mike Crapo (R-Idaho)

Nay (as House member)

Yea

Yea

Yea

Yea

Ranking Member: Ron Wyden (D-Oregon)

Yea

Yea

Yea

Yea

Yea

Senate Foreign Relations
Chair: Jim Risch (R-Idaho)

N/A

N/A

Yea

Yea

Yea

Ranking Member: Bob Menendez (D-New Jersey)

Nay

Nay

Nay

Yea

Nay

* China Permanent Normal Trade Relations
** Trade Promotion Authority

We expect the following impacts on 2019 U.S. trade priorities:

Impact on U.S.-Mexico-Canada Trade Agreement (USMCA)

The new USMCA is expected to be signed at the end of this month. USMCA would have likely passed in a Republican-held Congress on a bumpy but ultimately consistent trajectory. It will still likely enjoy broad backing in the Republican Senate. With Democrats now in control the House, there may be some new challenges to ratification.

Some of the new provisions in USMCA give cover for Democratic support—including the new wage-based rule of origin for autos and new enforceable labor rules, along with the weakening of investor-state dispute settlement. The Advisory Committee for Trade Policy and Negotiations (ACTPN), which includes the leaders of United Steelworkers and the International Brotherhood of Teamsters, last week expressed unanimous support for the agreement. But these changes still might not be enough to gain wide Democratic support. The Labor Advisory Committee for Trade Policy and Negotiations (LAC) noted several reservations on the agreement. Major environmental groups are also already preparing for a major advocacy campaign against USMCA. We expect House Democrats to seek additional concessions from the administration, particularly on the enforceability of the new labor provisions, on the environment, or possibly in the area of intellectual property protections.

If USMCA is signed on November 30, the U.S. International Trade Commission (USITC) would have to publish a study on its probable economic impacts by March 15, 2019, according to Trade Promotion Authority (TPA) procedures. The agreement could theoretically be voted on at any point after publication of the report, but difficulties in assembling the needed votes for implementing legislation would likely delay the process. The Trump Administration may still attempt to withdraw from the existing NAFTA as a tactic to force Congress to pass USMCA. It remains unclear how House Democrats or Senate Republicans would react to such a threat. The role of the business community will be key. The White House would look to U.S. business, including agribusiness, to generate bipartisan support for the agreement.

Impact on Future U.S. FTAs: U.S.-Japan, U.S.-EU, U.S.-UK

The U.S. Trade Representative (USTR) notified Congress on October 16 of its intention to begin negotiations for trade agreements with Japan, the EU, and the UK. The earliest that formal negotiations for the Japan and EU agreements could start is January 14, while negotiations with the UK would have to wait until after Brexit on March 29. USTR’s negotiating objectives for these agreements could be published in December or later.

For the new Congress, the Republican majority in the Senate and Democratic majority in the House will have differing sets of concerns for the new negotiations. Senate Republicans will seek many of the outcomes they sought in the NAFTA renegotiation. The Democratic House leadership is likely to call for new measures on labor and the environment, intellectual property, and/or dispute settlement. Some of these, such as opposition to investor-state dispute statement, would resonate with USTR Lighthizer and the White House, though it’s not clear how far the administration would move in the Democrats’ direction on labor or environmental issues. Consideration of the USMCA will be an early test on issues of concern to Democrats that will have implications for other agreements.

USTR is seeking short-term delivery of less controversial outcomes on regulatory alignment and other limited market access issues (such as an enlarged quota for high-quality beef and sales of U.S. soybeans) as part of an early harvest for negotiations with the EU, while with Japan the immediate priorities appear to be focused on market access for autos and agriculture.  Such priorities are not likely to require Congressional ratification and so will be less affected by the changes in Congress.

Impact on Section 301 tariffs

President Trump is expected to meet with President Xi at the G20 Summit in Argentina on November 30- December 1. While the White House has downplayed expectations for the meeting, others see the possibility of beginning a meaningful U.S.-China dialogue and perhaps moderating or delaying additional tariff actions. If no accommodation or way forward is reached, the U.S. has indicated it will increase existing tariffs on certain goods from 10 percent to 25 percent in January, with some reports that the U.S. could also impose new tariffs on nearly all remaining Chinese imports. China would likely respond in kind to any new tariffs.

The new Congress is not likely to change the direction of the U.S. economic relationship with China, although the plight of U.S. farmers facing their worst economic year in a long time might have some effect in pushing individual Members of Congress to seek a moderate course. We expect Republicans in the Senate will continue to have concerns on the impacts of China’s retaliation on the broader economy, but still be reluctant to contradict the administration’s approach. The Democratic-controlled House may be more enthusiastic in supporting tariffs overall and could give the Trump Administration cover to take a harder line if circumstances warrant, although may push back where there are specific constituent impacts. In fact, if the Trump Administration reaches a deal with China at the end of November (or anytime afterward), incoming House Democrats could use their newfound leverage to criticize the administration’s efforts and seek to outflank the administration on China issues. China policy is certain to figure in both parties’ presidential election campaigns as the 2020 presidential election begins to take shape during 2019.

While the current approach broadly to China is likely to continue, there may be enough bipartisan support for the new Congress to continue pushing the administration for a product-exclusion process for the 10 percent tranche of tariffs announced last September.

Impact on Section 232 tariffs

The Trump Administration has implemented tariffs on all imports of steel and aluminum, subject to certain country-specific exceptions. Negotiations for some country-specific exclusions could continue through 2019 (e.g., for Canada, Mexico, Japan, or the EU). In addition, the Trump Administration is considering implementation of tariffs on imports of autos and auto parts.

Changes to the control of Congress are not likely to affect the ongoing Section 232 tariffs related to steel and aluminum. House Democrats and Senate Republicans are likely to take positions on the Section 232 tariffs based on the economic impact for their district or state. Members from steel-heavy districts and states will continue to be supportive of the tariffs, while those from districts and states suffering from negative economic consequences because of retaliation or increased downstream costs are more likely to oppose.

Unless the Trump Administration imposes additional tariffs, we would not expect the new Congress to pass legislation designed to restrict the president’s Section 232 authority, as introduced by Senator Bob Corker (R-Tennessee) in the Senate and Representative Mike Gallagher (R-Wisconsin) in the House earlier this summer. That legislation did not have the votes to pass at the time, and the new Democratic majority in the House is not likely to increase the chances of passage.

In the area of the administration’s potential imposition Section 232 tariffs on autos and auto parts, the economic consequences of the tariffs and any resultant retaliation from other countries are likely to be broad. We would continue to expect a significant degree of bipartisan Congressional opposition to new Section 232 tariffs on autos.

Interaction between International Trade and Domestic Issues

Domestic factors are likely to dominate in shaping international trade and economic policy over the course of the new Congress and the remainder of President Trump’s term. Emerging issues, including renewed interest in comprehensive U.S. federal privacy legislation, could influence future U.S. trade-related rules (e.g., on cross-border data flows) as well as set policy models that other governments could replicate.

While the Trump Administration may be keen to pivot to international issues given its lack of a Congressional majority at home, its ability to negotiate and conclude agreements on multiple fronts could be complicated as it seeks to manage an increased array of investigations and oversight by the Congress. Add to this the inevitable turnover of Cabinet members and White House and Executive Branch staff changes that will occur after the mid-terms, and the administration may see a temporary hiatus in undertaking new policy initiatives, including on trade.

Furthermore, the upcoming presidential campaign could set the stage for an intra-party debate among Democrats on whether to take an even more hawkish approach on trade issues than the current administration; stay the current course; or return to a more centrist policy as was ultimately adopted by the Obama Administration while in office.

On September 17, 2018, the White House directed the United States Trade Representative (USTR) to implement 10 percent tariffs on nearly all the tariff lines in the original Section 301 List 3 valued at approximately $200 billion. Significantly, the notice does NOT indicate that there will be an exclusion process similar to Section 301 List 1 and 2.

The following day, the USTR issued a press release stating, “The [final] list contains 5,745 full or partial lines of the original 6,031 tariff lines that were on a proposed list of Chinese imports announced on July 10, 2018.”

On September 18, 2018, the USTR published the formal notice of this action in the Federal Register. 83 Fed Reg. 47,974.

For an unofficial downloadable spreadsheet providing affected HTS subheadings across all Section 301 actions, please click here. This includes:

  • Final List 1 ($34 billion);
  • Final List 2 ($16 billion);
  • Original List 3 ($200 billion);
  • Final List 3
    • Part 1 (5,745 lines);
    • Part 2 (11 Partial Lines listing 8-digit lines with their 10-digit exceptions); and
  • The 286 removed HTS codes.

The White House statement said the tariffs will rise to 25 percent on January 1, 2019.

On August 3, 2018, China threatened retaliatory tariffs on $60 billion worth of U.S. goods should President Trump move forward with any tariffs. This would result in a possible List 4.

Check here for the latest developments on all the on-going trade actions.

On September 18, 2018, the United States Trade Representative (USTR) published a notice in the Federal Register explaining the procedures and criteria related to requests for product exclusions from the additional tariffs placed on goods from China on August 23, 2018.

Deadlines

The USTR must receive requests to exclude a particular product by December 18, 2018. Responses to a request for exclusion of a particular product are due 14 days after the request is posted in the docket. Any replies to responses to an exclusion request are due the later of 7 days after the close of the 14 day response period, or 7 days after the posting of a response.

Per the notice, a docket will be opened on regulations.gov for the receipt of exclusion requests. The docket number is USTR–2018–0032. One product is allowed per request. Each request must identify a specific product and the 10-digit HTS. The product exclusion request must include the identity of the product, its physical characteristics and how to differentiate that product from others under the 8-digit HTSUS subheading. The USTR will not consider requests that identify the product using criteria that cannot be made public, or that identify the product by using the producer, importer, customer, chief use, trademark or trade name.

The USTR will periodically announce decisions on exclusion requests. If granted, the exclusion will be retroactively effective starting August 23, 2018 and extend for one year after the date on which the decision is published in the Federal Register.

 

On August 8, China released its list of retaliatory tariffs on $16 billion in U.S. goods. This was in direct response to the USTR’s announcement on August 7 of the final List 2 of Section 301 tariffs on $16 billion in Chinese imports. The Chinese Ministry of Finance’s list released today includes an additional 219 tariff items that were added to the list China originally released back in June. Both the U.S. and China are setting tariff rates at 25% for this second tranche of goods and plan to implement the duties on August 23.

Please click here for an unofficial English version of the HTS Subheadings on the Chinese list.

For an overview of the current U.S. Section 301 tariff status, please click here.

 

 

 

 

 

On August 7, 2018, the United States Trade Representative (USTR) released a final list of approximately $16 billion worth of imports from China that will be subject to a 25 percent additional tariff. The list contains 279 of the original 284 tariff lines that were on a proposed list announced on June 15.

Update: the five tariff items that were excluded from the final List 2 are:

3913.10.00 Alginic acid, and its salts and esters, in primary forms
8465.96.00 Splitting, slicing or paring machines for working wood, cork, bone, hard rubber, hard
plastics or similar hard materials
8609.00.00 Containers (including containers for transport of fluids) specially designed and
equipped for carriage by one or more modes of transport
8905.90.10 Floating docks
9027.90.20 Microtomes

Changes to the proposed list were made after USTR and the interagency Section 301 Committee sought and received written comments and testimony during a two-day public hearing last month. Customs and Border Protection will begin to collect the additional duties on the Chinese imports on August 23.

A formal notice of the $16 billion tariff action will be published in the Federal Register. Please contact us if you have any questions or need assistance.

 

On July 10, 2018, U.S. Trade Representative (USTR) Robert Lighthizer announced that at President Trump’s request, USTR has initiated the process of imposing an additional 10 percent ad valorem duty on approximately $200 billion worth of imports from China including apparel, textiles, chemicals, and agricultural & aquacultural goods.

The USTR statement includes a link to an advance copy of the Federal Register Notice with the list of proposed tariffs and the process for the public notice and comment period. The notice will be published in the Federal Register later this week.

This is the third round of additional tariffs proposed by the Trump administration as a result of its Section 301 investigation into China’s alleged unfair trade practices related to “the forced transfer of American technology and intellectual property.”

The notice indicated the USTR will maintain the first round of tariffs on $34 billion worth of goods implemented on July 6, and will continue with a second round of proposed tariffs on $16 billion worth of goods. This second list is currently under review in a public notice and comment process, with a public hearing scheduled for July 24, 2018.

The Harmonized Tariff Schedule of the United States (HTSUS) subheadings of the products subject to the proposed tariffs is listed in the Annex (pages 11-205) to the notice.

The notice also included a list of key dates for a public notice, comment, and hearing process:

  • July 27, 2018: Due date for filing requests to appear and a summary of expected testimony at the public hearing, and for filing pre-hearing submissions.
  • August 17, 2018: Due date for submission of written comments.
  • August 20-23, 2018: The Section 301 Committee will convene a public hearing in the main hearing room of the U.S. International Trade Commission, 500 E Street SW, Washington, DC 20436 beginning at 9:30 am.
  • August 30, 2018: Due date for submission of post-hearing rebuttal comments.

 

 

Section 301 For covered products in List 1, please click here. 25% 7/6/2018
For covered products in List 2, please click here. TBD TBD
For covered products in List 3, please click here and see Annex 10% TBD
Status: List 1 totaling $34 billion worth of imports is composed of 818 tariff lines, and went into effect on 7/6/2018.

 

List 2 totaling $16 billion worth of imports is composed of 284 proposed tariff lines identified by the interagency Section 301 Committee. These are in a public review process.

 

List 3 includes a list of tariff lines of products from China with an annual trade value totaling approximately $200 billion. These are also subject to a public review process.

On June 20, 2018, the U.S. Trade Representative (USTR) announced in the Federal Register that, beginning on July 6, 2018, an additional 25% duty will be imposed on products from China set out in Annex A of the notice. The USTR also released details on the public hearing and comments schedule regarding additional proposed tariffs on the list of products set out in Annex C of the notice.

Yesterday’s notice confirmed the USTR’s proposed Section 301 actions on two lists of tariff lines released through a press conference on June 15. The first list included 818 tariff lines valued at $34 billion worth of imports from China. The second list includes 284 tariff lines and is valued at $16 billion worth of imports from China. For details, please click here.

The USTR will convene a public hearing regarding the second list of tariff lines on July 24, 2018. Interested parties are required to file a request to appear at the hearing and a summary of expected testimony by June 28, 2018.

Written comments pertinent to the second list of tariff lines are due by July 23, 2018. Rebuttals to those comments are due by July 31, 2018.

The USTR determined it would establish a process by which U.S. stakeholders could request that particular products classified within a covered tariff subheading in Annex A be excluded from these additional duties. However, details on the exclusion process have not yet been released. The notice indicates that USTR will publish a separate notice describing the product exclusion process, including the procedures for submitting exclusion requests, and an opportunity for interested persons to submit oppositions to a request.

 

 

 

 

 

 

On January 22nd, President Trump imposed new “safeguard” tariffs on imported solar panels and washing machines, which will be in place for the next three years before tapering downward.  For the renewable energy industry, this is another major blow from this administration. Solar panels, most of which currently come from China will have an additional tariff rate of 30% imposed. Notably, there are already more than 150 other U.S. trade measures in place against various Chinese products. This new measure threatens to handicap a $28 billion industry that relies on parts made abroad for 80 percent of its supply chain.

Trump has also imposed a tariff of 20% on imported washing machines.  This is the first use of safeguard tariffs by the United States since 2002 when President Bush used them to restrict steel imports.  This decision comes on the heels of a determination by the International Trade Commission (ITC) that imports of these goods had injured domestic producers.

While many have seen the action as a necessary means of protecting American manufacturers, members of the South Korean government have harshly criticized the move and signaled a willingness to formally air their grievances before the World Trade Organization (WTO).  Significantly, the 2002 safeguard tariffs imposed by the Bush Administration were ultimately withdrawn after an adverse ruling at the WTO put the United States under the threat of retaliation.

The Department of Commerce submitted its report on the impact of steel mill product imports on U.S. national security to President Trump on January 11.

In a statement on its website, the Department announced that the long-awaited results of the investigation, commonly known as the Section 232 Report, will not be made public until after the President makes his final decision. 

Although the president has 90 days to act, he has the discretion to announce his decision early. 

 

At President Trump’s direction, on August 14, the United States Trade Representative (USTR) initiated an investigation under Section 301 of the Trade Act of 1974 against China’s laws, policies, or actions that could threaten U.S. intellectual property and technology development.

USTR Robert Lighthizer commenced the preliminary stages of the investigation and will convene a public hearing on October 10 at the U.S. International Trade Commission. The results of the investigation could lead to additional tariffs or restrictions on imports from China.

This is the third investigation the administration has initiated concerning foreign imports and trade practices. The U.S. Department of Commerce is currently conducting two investigations on whether U.S. imports of aluminum and steel products threaten national security.

The President’s August 14 memorandum unveiled the following four types of conduct USTR will consider during the investigation:

  • Whether the Chinese government uses a variety of tools to regulate or intervene in U.S. companies’ operations in China to transfer U.S. technologies and intellectual property to Chinese companies;
  • Whether the Chinese government’s policies and practices deter U.S. companies from issuing market-based terms in licensing and technology-related negotiations with Chinese companies; and
  • Whether the Chinese government obtains high-technology products and intellectual property by investing in or acquiring U.S. companies pertinent to Chinese government industrial plans;
  • Whether the Chinese government is breaching U.S. commercial computer networks to access and/or steal intellectual property, trade secrets, or business proprietary information.

USTR will determine whether the aforementioned four types of conduct are actionable under Section 301 of the Trade Act.  Pursuant to the Trade Act of 1974, USTR must determine within 12 months from the beginning of the initiation whether any act, policy, or practice described in Section 301 exists.

In general, the retaliatory action proposed by USTR must be implemented within 30 days of the determination. USTR may delay the implementation up to 180 days if it determines that substantial progress is being made regarding removing the trade barrier. If the determination is affirmative, then USTR will decide what action, if any, to take.

Though certain company executives and politicians support the investigation as a way to help U.S. businesses access the Chinese market without conceding their intellectual property to the Chinese government, others are more reluctant to voice their opinions due to their fear of drawing retaliation from China.

The investigation comes shortly after the Chinese government unveiled a new cybersecurity law to “protect personal information and individual privacy” in late May of 2017. The law requires foreign companies operating in China to reveal intellectual property to the PRC and forces these companies to store their data to local servers. U.S. companies are now instructed to participate in a joint venture with Chinese enterprises, therefore sharing valuable technology information with their Chinese counterparts.

There has only been one recent USTR Section 301 investigation in the past two decades. In 2010, USTR initiated a Section 301 investigation of Chinese policies and subsidies supporting its wind and solar industries. Because the issues covered involved U.S. rights under the World Trade Organization, USTR requested WTO dispute settlement consultations with the government of China. Less than a year after the initiation of the investigation, China removed the challenged acts. Thus, it is possible that this current Section 301 investigation could follow a similar timeline, whether or not WTO rights are implicated.

For more information, contact: Robert Holleyman, Dan Cannistra, Ben Caryl, Cherie Walterman