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Section 301 Tariffs: A Comprehensive Guide

September 20, 2019
Julia Hecht
The section 301 tariffs were put in place by the USTR by order of the President, as a consequence for the unfair trade practices China was found to have been guilty of for years. These tariffs impact all goods imported from China, and have caused severe economic obstacles for companies that source their products from China, forcing them to find creative solutions in order to continue business operations.

Everyone in the supply chain industry has been talking about section 301 tariffs in borderline apocalyptic terms. The trade talks with China seem to be going nowhere, and manufacturing in China has gotten progressively more difficult over a jarringly short period of time. But what do these changes mean? And what does it really entail for U.S. importers and their customers? 

Section 301 tariffs were put in place by the USTR by order of the President, as a consequence for the unfair trade practices China was found to have been guilty of for years. These tariffs impact all goods imported from China and have caused severe economic obstacles for companies that source their products from China, forcing them to find creative solutions in order to continue business operations.

What Are the Section 301 Tariffs?What are the Section 301 tariffs

As the global economy grows, a network of free trade agreements between countries has begun emerging to make trade between trusted partners a faster, cheaper process. However, sometimes, a country will violate the agreement, or act in a way that goes against the interests of their trade partner. When this happens, something must be done to re-establish a fair arrangement, or to terminate the agreement entirely.

In the United States, the Office of the United States Trade Representative (USTR) is the agency with the authority to regulate and monitor the trade agreements that have been established with other countries. Sections 301 to 310 of the Trade Act of 1974 allows the USTR to conduct investigations on countries that are suspected of trade agreement violations, and take the necessary actions to correct it. This action usually takes the form of an increased tariff rate, to make up for the perceived monetary deficiency caused by illegitimate or unfair trade practices.

In 2017, the USTR turned its attention to the suspicious trade behaviors of one of the U.S.’s largest trade partners: China. In section 301 investigations, China was found to be guilty of 4 different practices that burden U.S. commerce. 

  1. China was found to be forcibly acquiring the intellectual property and vital technologies from U.S. companies by requiring them to disclose important details with prying approval processes or joint venture requirements. 
  2. Chinese policies restrict the U.S.’s ability to set the market terms for price negotiations and licensing.
  3. The Chinese government was investing in domestic companies in targeted industries that would substantially hurt the assets of U.S. companies and their standing in China’s economy.
  4. The Chinese government is supporting unauthorized access to secure data networks, for data-thieves to steal trade secrets and vital information from U.S. companies. 

As a result of these findings, the U.S. government imposed tariffs on Chinese goods to make up for the money they were losing as a result of those policies. 

Do Section 301 Tariffs Include Taiwan?do section 301 tariffs include taiwan

Taiwan is officially known as the Republic of China and is considered by Beijing to be simply a renegade province of China. However, the 301 tariffs that the U.S. imposed on China do not apply to Taiwan. Likewise, it also does not apply to Hong Kong or Macau. 

There are a few reasons why the tariffs do not include Taiwan. For one thing, despite how the Chinese government considers it, Taiwan is an independently governed island and is considered to be its own country by most of the world. It is not involved in the trade agreement violations and does not even remotely benefit from them.

In addition to that, the manufacturing and export business in Taiwan is nowhere near as developed as in mainland China. In 2018, shipments from Taiwan accounted for less than 2% of all U.S. imports, compared to 21.2% from China.

Taiwan does not have a free trade agreement with the United States and is not involved with the political decisions of mainland China, so the Trade Act of 1974 does not apply. The USTR cannot enforce the 301 tariffs in a country with which the U.S. does not have a free trade agreement.

List of Section 301 Tariffslist of Section 301 tariffs

After the U.S. investigation of China, President Trump had to come up with a plan for balancing the trade deal once more. He issued a tariff to be included on several different types of products, in addition to the normal tariff rate. This list of products is called a “retaliation list,” but he didn’t just stop at one.

There are now 4 retaliation lists in place, covering almost every single product that China exports. 

List 1

The first list of products affected by new tariffs was directly related to the accusations against China. Because of the Chinese acquisition of U.S. technologies, the majority of items on this list were industrially significant technologies. 

Originally, the list called for a tax of 25% to be applied to these products, in addition to the already existing tariff rates for each specific item. However, the rate will likely rise to 30% in October 2019. The discussion is open for public comment, as of September 2019.

This list includes many different kinds of products and contains $34 billion worth of imports. Some of these products are:

  • Boilers
  • Engines
  • Nuclear Reactors
  • Turbines
  • Machinery Parts
  • Construction Machinery
  • Farming Equipment
  • Printing Machines
  • Drilling Machines
  • Industrial Furnaces
  • Electrical Machines
  • Insulated Electric Conductors
  • Rail Locomotives
  • Motor Vehicles
  • Microscopes
  • … And more

The entire list of products in List 1 is quite long and encompasses many different industries. 

List 2

In August 2018, only a month after the first list went into effect, a second list on another $16 billion worth of imports was introduced. Like List 1, this one was also originally subject to a 25% tax, which was later renegotiated to go up to 30% in October of 2019. 

List 2 continues the theme of taxing industrial materials, but applies to some of the raw materials that got left out of the first list, like:

  • Lubricating Oils and Grease
  • Polyethylene
  • Resin
  • Silicone
  • Petroleum
  • Chlorides
  • Nitrates
  • Tubes and Pipes
  • Wires and Cables
  • Electric Circuits 
  • Multimeters
  • … And more

Although not as long as List 1, there are plenty of products in List 2

List 3

List 3 is where things began to get messy. Rather than addressing the U.S. concerns, China issued a retaliatory 25% tariff on U.S. goods, valued at $50 billion—equivalent to the U.S. tariffs on China. 

As a result of China’s retaliation, a third list was drafted. This list would propose an additional 10% tariff rate on $200 billion worth of Chinese goods and encompass products that had little to do with industrial technology. 

As with the other lists, List 3 was set to increase the tariff rate to 25% in January of 2019, then to 30% in October of 2019. These drastic increases were meant to deter China from issuing another retaliatory tariff in response. 

This new, extensive list includes products like:

  • Live, fresh, frozen, or prepared fish and meats
  • Dairy
  • Eggs
  • Honey
  • Feathers, hides, and furs
  • Corals
  • Vegetables
  • Nuts
  • Fruits
  • Printer ink
  • Textiles
  • Ceramic materials
  • Metal components 
  • Knives
  • Lawnmower parts
  • Sewing Machines
  • Calculators
  • Vacuum cleaners
  • Microwave oven parts
  • … and many more

Unlike the first two lists, the items in List 3 have little relevance to each other. List 3 is vast and encompassing, and covers close to 6,000 different subheadings in the Harmonized Tariff Schedule of the United States. 

List 4

As a result of continued resistance from China, a final list was drafted to cover the rest of the goods not already covered by one of the first three lists. The imports affected by this list amount to an approximate value of $300 billion. 

Originally, the tariffs were going to be 10%, but like the other lists, that was also later rethought and increased to counter the retaliatory tariffs imposed by China. Now, the rate is set at 15%, but the list was split into two sections to spread out the introduction of the tariffs. 

List 4A was set to go into effect on September 1st, 2019, while List 4B was set for December 15th, 2019. 

Combined, the entire List 4 contains a huge variety of products, like:

  • Live animals
  • Oils
  • Syrups
  • Alcohol
  • Tobacco 
  • Books
  • Apparel
  • Shoes
  • Glassware
  • Pearls
  • Cash registers
  • Computer monitors
  • Wristwatches
  • Firearms
  • Fishing hooks
  • Antiques
  • … and more

The products in List 4 are so varied because the list is intended to cover every single product that China exports, except for what was already included in previous lists. 

However, in the interests of public health and the economy, there are certain products that are automatically excluded from List 4. Some pharmaceuticals, medical tools, rare materials, and critical minerals will not be included in this new list. 

Section 301 Tariffs Effective DateSection 301 Tariffs Effective Date

There are many different facets to the section 301 tariff decisions, and they continue to evolve as the trade negotiations between the U.S. and China escalate. Over time, the simple decision to increase tariffs on a list of products has evolved to include 4 different lists, and the percentage of additional duty has changed over time. Because of this, there isn’t just one date for everything to start. There are different effective dates for each list, and for each change made to them. 

Below is a basic timeline of events, to help you see what has changed so far, and what changes will be implemented:

July 6, 2018 - 25% additional tariff rate applied to List 1 items.

August 23, 2018 - 25% additional tariff rate applied to List 2 items.

September 24, 2018 - 10% additional tariff rate applied to List 3 items.

May 10, 2019 - Tariff rate raised to 25% for List 3 items.

September 1, 2019 - 15% tariff rate applied to List 4A items.

October 15, 2019 - Tariff rate raised to 30% on Lists 1, 2, and 3 items. 

December 15, 2019 - 15% tariff rate applied to List 4B items.

Section 301 ExclusionsSection 301 Exclusions

After a round of new tariffs is introduced, there is a brief period of time where individuals or corporations can request that a specific product be excluded from the list. If the requester can provide good, justifiable evidence to support their claim, the USTR grants them an exclusion on the specific product. 

However, this exclusion status is not permanent, and each list of exclusions is set to expire after one year.

In order for the product exclusion request to be considered, requesters are required to electronically submit the following information to the USTR:

  • Identify the product that you want to have excluded, including a description of characteristics like weight, dimensions, composition, and color. It is important to distinguish how this product is different from other similar products on the list. 
  • Include the 10 digit HTSUS code that identifies the product. 
  • Submit information on the U.S. Customs and Border Protection (CBP)’s ability to manage the exclusion, if it is granted. Include the frequency of imports, the quantity of goods, the cost of sourcing or manufacturing the goods, and the true value of the shipments.
  • Explain whether or not the product being requested for exclusion is only available from China.
  • Explain whether the tariff would cause serious economic harm to you or the general U.S. population. 
  • Justify whether or not the product is actually significant to China’s industrial programs, like the “Made in China 2025” initiative. 

Exclusion requests are currently being accepted through September 30, 2019, for List 3. After that window closes, the USTR will no longer consider requests for exclusions. 

As of September 2019, the list 4 exclusion process has not started yet, but there is still something to note about this unique list. 

List 4 is intended to cover all products that fall outside the scope of the first three lists, regardless of its relevance to the Chinese industrial programs. Thankfully, however, any product that has already been granted exclusion from any of the previous lists will remain unaffected by List 4—even if the item was originally excluded for being unrelated to China’s programs. 

In addition to that, because List 4 is divided into two separate sublists, List 4A and List 4B will have different deadlines to submit exclusion requests. 

Are Section 301 Duties Eligible for Drawback?Are Section 301 Duties Eligible for Drawback

Yes! The CBP has stated that the items taxed under the Section 301 Tariffs are eligible for duty drawback. But what does that mean?

Duty drawback, to put it simply, is like a refund for the taxes paid on any imported items that are subsequently re-exported again or destroyed within three years. So, an importer could pay the additional duties, store the products in the U.S. for a little while, and then export them to a distributor in France within three years. They could then apply for a drawback, to get refunded for the additional duties they paid for items that did not stay in the U.S. This is to ensure that the duties only apply to products that are intended for U.S. consumers, and not other U.S. trade partners.

However, because of the United States-Mexico-Canada Agreement (USMCA), otherwise known as NAFTA 2.0, exporting the Chinese goods to Mexico or Canada could complicate the drawback request. 

How to Avoid Section 301 TariffsHow to avoid section 301 tariffs

These section 301 tariffs can place a significant monetary burden on importers. Smaller or less-established companies may struggle to survive with these new taxes in place, and oftentimes, the higher costs trickle down to the customers. When prices go up, though, customers get mad, so it can feel like there is no way to win in this situation.

Thankfully, there are legal ways to get around the tariffs or to limit their impact on your business so you don’t have to upcharge your customers to keep the business alive. 

Foreign Trade Zones and Bonded Warehouses

One of the ways that importers can reduce the impact of the tariffs is by utilizing a Foreign Trade Zone (FTZ). FTZs are places within the U.S. borders, close to ports of entry, where imported goods can be treated as though they are outside the U.S. 

As long as the goods remain in storage in a FTZ, you would not need to pay the duties on the import. Once the products exit the FTZ and get introduced into U.S. commerce, then the duties would need to be paid.

Now, that might not seem like a great solution. After all, the duties still need to be paid no matter what. However, this kind of strategy can be tremendously beneficial, especially to small businesses. Utilizing an FTZ can allow large quantities of products into the U.S. and clear customs, without having to pay all the tariffs upfront. Then, as products are slowly pulled from the FTZ storage, the duties can be paid over time as the products enter U.S. commerce. 

Similarly, bonded warehouses also function as a place where products can be stored duty-free for up to 5 years, under the supervision of the CBP. There, they can be slowly introduced into the market, undergo manufacturing operations, or re-exported again without having to pay any duties upfront. 

If the products imported into the bonded warehouse are manufactured into a different product then exported out of the U.S. again, then the duties would not need to be paid at all since the products never made it to U.S. consumers.

Being able to pay the duties over time, instead of all at once, makes them much more manageable. If you are having trouble factoring in the huge monetary burden, taking advantage of a FTZ or bonded warehouse could give you the time you need to pay off the duties over time, and still offer your customers the product costs they have come to expect. 

Exclusion Requests

If you know in advance that a product you sell is going to be included in the next wave of tariffs, take the initiative early on to apply for an exclusion request. Although it is more likely to be denied than granted, there’s a chance your request could be granted. If the reasons you give are compelling and honest, then you may end up being granted the exclusion. 

However, product exclusions are not a perfect solution. Even though the product will be completely free from the 301 duties, the exclusion is only good for roughly a year after the exclusion decision is published. This means that after a year, you will need to start paying duties to import those products. 

Granted, it can be helpful to have an extra year to factor that into the budget and prepare for the hefty tariffs. But eventually, you’re going to need to find a better solution if you want to limit the damages to your business. 

Duty Drawbacks

Another option for some importers is duty drawback. Although the concept was covered briefly above, there’s a lot to know about the process. For starters, there are many different kinds of drawbacks, depending on the circumstances:

  • Manufacturing direct identification: This type of drawback is the most straightforward, and fairly easy to explain. Say a company imports parts, like computer chips, motors, hinges, or wheels. The company then takes those parts, ships them to a factory, and manufactures a new product using that part. Once the new product is finished, it is exported out of the U.S. again to be sold in another country. In this case, the company can claim a drawback of 99% of the duties they paid on the original part. 
  • Manufacturing substitution: This type of drawback operates a lot like the first type. In this case, the company sources the parts from two different places: a supplier in China, and a domestic factory. Half the parts are imported, and half are manufactured in the U.S., but they are indistinguishable when compared. The company then does the same thing as in the first example, and manufactures a new product using these parts, then exports that product. It is impossible to tell which products were made using the imported part, and which were made with the domestic part. However, the company can still claim a drawback of 99% of the duties paid on the parts, as long as the foreign and domestic parts are of the same kind and quality. The company cannot claim duty drawback on more parts than were imported.
  • Unused merchandise direct identification: When a company imports more products than it needs, those extra products could end up getting returned to the foreign manufacturer, or sold to another customer overseas. When this happens, the products are considered “unused” or “same condition,” and can be exported again in the same condition they were imported. The company can then apply for a duty drawback of 99% on the reexported products, much like with the first two examples, as long as the products are exported within three years of being imported. This type of drawback can also be used for products that are destroyed within three years, as long as the products have not been used in the U.S., and the destruction is done under the supervision of the CBP.
  • Unused merchandise substitution: A company that sources its materials from two or more locations both within and outside the U.S. can still claim a duty drawback after exporting those materials out. As with the manufacturing substitution, the products made in both the foreign and domestic facilities should be commercially interchangeable in order to be applicable. The substituted products should be unused, of the same kind and quality as the original imports, and exported within three years. As long as those conditions are met, then the company can apply for a duty drawback of 99%—the same as if they were exporting the original merchandise. 

Those are just a few of the many types of drawbacks one can claim.

The CBP is not obligated to assist you if mistakes are made, so it is very important to understand the process well. With that said, as long as good records are kept of when the products were imported, exported, and sold, then the paper trail necessary to complete the drawback application should be easy to retrieve. 

The most important documents involved in the process of applying for a drawback are proof of exportation, documents related to any manufacturing done in the U.S., and information on the importation of the goods and which refund is being claimed. 

Since the exporter of the goods is the individual that would receive the drawback funds, the original company that imported the goods might not be the entity receiving the drawback. If a company sells the products to an exporter to export, then the transaction would need to include a certificate of delivery to transfer the ownership and responsibility to the exporter. 

Tariff Classification Review

Depending on the product, it may have been possible previously to skate through customs with an incorrect Harmonized Tariff Schedule of the United States (HTSUS) code. As trade agreements developed, the consequences for improperly classifying goods became less severe since the duties for some products had been reduced to nothing. 

Now though, the products affected by the tariff increases are defined by their HTSUS numbers. Although almost all products are now included in the section 301 tariffs, it could still be beneficial to reconfirm the classification on your products. You can do this yourself by submitting a classification request to the CBP or many customs brokers will assist with this task as well.

To submit a classification request, you will need to submit some specific information to the CBP, like:

  • A thorough description of the product
  • The materials it is composed of
  • The primary use of the product in the U.S. 
  • The common, commercial, or technical designation of the product
  • Drafts, sketches, or photographs of the product
  • Chemical analysis
  • Lab reports
  • The requester’s closest approximation of what they believe the HTSUS code should be, and why
  • Any other information that could be potentially helpful in classifying the item

Although this method may or may not save you money, it could save you a lot of time and certainly a lot of trouble. This can assist you in identifying if your product is excluded, or subject to 25% or 15% tax. It is extremely important now to ensure that you are using the correct classification for your goods. If you are misclassifying your products, and you are found to be paying the incorrect duties, serious consequences can occur. 

Shifting Manufacturing to Another Country

If nothing else seems to work for you, and the 25% tariffs are simply too much for you to continue doing business in China, then the only reasonable option left is to move your outsourced manufacturing to another country. As a general rule, shifting manufacturing is a massive undertaking, especially for larger companies, but there are intermediary firms that are emerging in other Asian countries to assist with this move.

Some of the more popular options for moving manufacturing has been China’s neighboring countries in Asia, like India, Vietnam, Taiwan, and Malaysia. However, Mexico is also emerging as a contender in the race to relocate U.S. companies.

Import Under Section 321 De Minimis

Finally, there is one last little loophole that some companies may be able to take advantage of to avoid the increased tariff rate. Section 321 De Minimis shipments, also called Section 321 ACE Shipments, are the last opportunity for importing products duty-free.

In order to qualify for a duty-free shipment of goods, several requirements need to be met:

  • The value of the goods cannot exceed $800 
  • Multiple packages cannot be consolidated if the total value exceeds $800
  • The shipment must be filed in the Automated Commercial Environment (ACE) eManifest system prior to arrival
  • The goods must not be under regulation from other government agencies, like the FDA or EPA
  • The goods must not be subject to any kind of mandatory inspection, regardless of value
  • Evidence of the value of the goods must be provided in some form

When filing an informal 321 De Minimis shipment, no customs bond is required and no duties need to be paid. However, customs will only release one 321 De Minimis shipment to one entity per day, which is not a practical solution for most large-scale companies. 

Will Section 301 Tariffs Change?Will Section 301 Tariffs Change

Section 301 tariff decisions are still being debated, and since the trade talks with China seem far from coming to a conclusion, it seems likely that the tariff decisions will change. Unfortunately for U.S. consumers and importers, however, the changes are likely not going to reverse the tariff increases that have already been established. If anything, the tariffs will be increased.

As changes happen, it is important to stay flexible. Diversify your supply chain and try to find ways in which you can quickly adapt to unexpected changes. Having a good plan for when things go wrong can put you ahead of your competitors, many of which could get wiped out by hiked tariffs. 

Custom Consulting Services Through USA Customs Clearance

Section 301 tariffs have disrupted the normal business operations of millions of companies, and many are scrambling to find ways to overcome the chaos. Many companies are fleeing China, devising illegal ways to circumvent the tariffs, or quitting altogether. To make sure your company doesn’t fall by the wayside, you’ll need a strong strategy for overcoming the increased costs. There is no perfect solution since every company will require a tailored plan to fit their individual business for customs clearance.

If you need help coming up with the perfect plan for your business to deal with Section 301 tariffs, our dedicated team of consultants can help. With years of professional industry experience, our team can assist you in putting together the perfect strategy to help your business survive these difficult times. We're also available to help you with import export consulting services and advice for importing everything from pet supplies to rice and light fixtures

Use the button below to schedule a consulting session with one of our import experts or give us a call at 855-912-0406.

0 comments on “Section 301 Tariffs: A Comprehensive Guide”

  1. Hi
    Can you tell me what import rules I need to know to import resin and hardener kits for artists?

    Is there a chemical registration body I need to apply to?

    Also do you assist non US residents with importing?

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