Restarting Tariff Exclusions Undermines Build Back Better, Rewards CCP Recalcitrance

By Charles Benoit, CPA Trade Counsel

Regrettably, the Biden Administration announced last week that they’re open to tariff cuts to imports of Made-in-China merchandise. First up are 549 different products, mostly machinery and technology products. But more may be coming. Ambassador Tai stated in her recent speech at the Center for Strategic and International Studies that the Administration “will keep open the potential for additional exclusion processes”. This is very troubling. Every China tariff cut undermines the opportunity of American workers and producers to build back better, and provides unjust enrichment to the Chinese Communist Party. But there is still time to contain the damage.

Importers swarmed USTR when tariff exclusions were first offered

In August 2017, the Trump Administration launched an investigation into China’s unfair trade practices. The focus was China’s treatment of intellectual property. This investigation was done via Section 301 of the Trade Act of 1974, which authorizes the President to impose tariffs against imports from nations engaged in unfair trade practices.

Following a finding by USTR in March, 2018 of wide-spread IP theft and disregard of trade laws – a.k.a, unfair trade – President Trump proclaimed tariffs against thousands of Made-in-China products. These tariffs were phased in between July, 2018 and September, 2019.

Under intense pressure from the import lobby, though, the Trump Administration allowed companies and associations from anywhere in the world to petition for relief. If they got the relief, it would apply to the product, not just the importer.

In the Trump Administration’s defense, in 2018, there was a plausible rationale: businesses needed a bit of time to shift their sourcing out of China, which would cost them money, so please don’t make that divesture harder by squeezing their profits during the transition.

The exclusion process, however, was swamped by importers once started. There was no cost to get a product excluded from the tariffs; you could apply for product exclusions in mere minutes, online. USTR was submerged by over 53,000 requests. USTR had to bring in outside contractors to sift through them all. Most requests were without merit, resulting in over 46,000 denials. An 87% rejection rate.

The exclusion process was also thankless for the President. Paul Krugman wrote in the New York Times that President Trump was “Making Tariffs Corrupt Again” and with the exclusions “there is every reason to believe that political favoritism is running wild.”

That process lasted less than two years, and aside from some Covid-related product exclusions, the last big tranche of tariff exclusions expired on December 31, 2020.

In total, from July 2018 to Dec. 2020, $463 billion of imports from China were subject to the 301 tariffs (although a much larger $719 billion of imports from China still came in without facing the tariffs.) The Wall Street Journal estimated in May 2021 that nearly two-thirds of imports from China were subject to the tariffs, but this was way off, according to a GAO analysis in July 2021.

Tariffs enjoyed bipartisan support across Administrations

Thankfully, throughout the election, the China tariffs enjoyed bipartisan support. This despite their well-heeled opposition in the Beltway and in the media.

As of the first week of October, 2021, the U.S. Treasury has collected a remarkable $107 billion in revenue. The pace has picked up thanks for the expiration of tariff exclusions, which were costing the Treasury almost $20 billion per month in the second half of 2020.

This tariff revenue is sorely needed, and the revenue is only one part of the good news. The other part is all the work businesses have done to relocate their sourcing out of China, and in some cases, even reshoring to America.

No rationale has been provided as to why the Administration is open to renewing exclusions

For the reasons above, the news from Ambassador Tai that exclusions would be restarting was very disappointing. Right after her speech, USTR issued a notice that they would revisit tariff exclusions for 549 different Made-in-China products.

Neither the official notice nor her speech offered any rationale for restarting the exclusion process. In the speech, the restarting of the exclusion process was wedged in as the second of four points to the Administration’s “strategic vision” on China. Ambassador Tai said only “we will start a targeted tariff exclusion process. We will ensure that the existing enforcement structure optimally serves our economic interests.”

The first, third, and fourth points of the strategic vision consisted of i) discussions with China, iii) expressions of concern to China; and iv) discussions with allies, respectively. It seems like all three of those points were hit last week. Mission accomplished?

While no rationale has been offered, we can use other parts of her speech to rule out the possibility that she thinks China has been improving its behavior. In the same speech, she made it clear things had gotten worse. She said “In recent years, Beijing has doubled down on its state-centered economic system” and “It is increasingly clear that China’s plans do not include meaningful reforms to address the concerns that have been shared by the United States and many other countries.”

Furthermore, the original rationale that some businesses may ‘need more time’ to adjust their sourcing is surely extinct now. America mobilized, fought, and won World War II in about four years, approximately the same amount of time since the start of the China 301 investigation. No more time is merited for businesses to continue to source from China for the U.S. market. Giving some importers ‘more time’ prejudices the businesses which heeded the warnings and made the investments to source elsewhere. And it continues to provide unjust enrichment for the Chinese government that benefited wildly from the flaunting of its trade commitments.

So why this is happening? A likely explanation is the simplest: there’s a lot of money committed to making it happen. The Government Accountability Office estimates that these tariff exclusions were worth $71 billion to the traders while they were in effect. And the U.S. Chamber of Commerce told the Administration last month that the group “remains unequivocally opposed” to the tariffs despite filing a fifty-eight page brief on the problems American businesses face in China.

Containing the damage

For the current comment period regarding the 549 products, domestic producers and those who source from outside China should consult the list of products and begin preparing their opposition comments for products relevant to them. Most relevant is whether the particular product can be sourced from outside of China. These comments can be filed as early as October 12th.

Second, we need to hammer home to the Administration that more tariff exclusions only mean unjust enrichment for the Chinese Communist Party, and those who seek to profit alongside the party. The case for no-exclusions is reinforced by the money at stake.


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