Senate’s ‘China Bill’ Hobbles USTR, Puts Chinese Exporters First

At first, Sen. Chuck Schumer’s (D-NY) Endless Frontier Act was deemed the anti-China bill. Then a bunch of other bills got thrown in with it as amendments, it got renamed the U.S. Innovation and Competition Act of 2021 and was redubbed the China bill. That’s an appropriate name. There’s a lot in this bill that companies who import from China, and Chinese companies themselves, will absolutely love.

The original intent of Schumer’s Endless Frontier Act remains in the Innovation and Competition Act. There’s more than $250 billion in spending proposed by the Senate in hopes it will lead to R&D advancements and the creation of a base of semiconductor foundries in the U.S., as opposed to where nearly all of them reside today – in Asia.

But there is also an attack on the previous government’s Section 301 tariffs against China. To make matters worse, it calls for more oversight into the US Trade Representative and an “audit” of ex-U.S. Trade Ambassador Robert Lighthizer. We view this as a shot across the bow of new Trade Ambassador Katherine Tai with a message: “Don’t be like Bob.”

The USTR does not make trade policy. So the Executive Branch will have to fight for it. As it is, the Senate bill chips away both at the original China tariffs and the autonomy of the USTR to follow White House trade policy.

The Senate passed the U.S. Innovation and Competition Act this week. One aspect of the bill: breathing down the necks of the USTR and auditing Robert Lighthizer, ex-USTR, on the process of exclusions from Section 301 tariffs.

Section 301s Under Attack

For the insider, the Section 301 trade rule allows for the U.S. government to impose tariffs and other import restrictions on countries as punishment for IP theft. For the layman, these are the China trade war tariffs put in place by Trump.

Because these were unprecedented at the time, companies were given the ability to file for exemptions. Thousands of products were included in the tariff list, and hundreds of companies applied for exemptions. Some got them, some did not. Now if the White House signs anything that looks like this Senate bill into law, not only will more companies get exemptions, but they will also get paid for their exemption request expiring, and companies that claim (or can prove?) that the tariffs rendered a product line unprofitable can also get an exemption.

The China trade war tariffs, therefore, run the risk of becoming a non-tariff trade policy if the House adopts the same language as the Senate here. We expect the House China bills to be voted on within the next six weeks. There is no official name for the single bill that will be voted on at this time.

The Senate’s 301-exclusion language is in Section 73001 of the U.S. Innovation and Competition Act. It shifts the burden to the USTR to show these companies had two years to find new sources of supply outside of China, and that their profitability is not due to tariffs. By shifting the burden of proof of non-harm by tariffs onto the USTR, it is setting them up to fail. It makes the denial of a tariff exemption harder, so anyone who applies for one – as Tesla and others did years ago – will likely get one. K Street lawyers will have a field day collecting fees on this one. They’ve been trying since October.

Moreover, the heading Trade Act of 2021 (Division G of the Innovation and Competition Act), where the Section 301 exemptions sit, directs the USTR to consider alternate actions rather than tariffs. It also asks them to examine the effect on consumer prices, a favorite siren call of free traders, as if prices somehow never rise in free trade environments.

The Senate bill also states that companies get paid back for the duties they have paid between January 2021 and now if they were granted an exemption. All exemptions ended at the end of 2020.

If enacted into law, the government will be paying back U.S. companies, and Chinese-backed LLCs who serve as China’s import operations here. To the majority China-owned companies, it would be like Washington saying, “We’re sorry for the trade war tariffs. Here is your check for twenty million dollars.”

Imagine the Chinese government repaying an American company for taxes and fees. The CCP would consider such a thing preposterous. While Beijing surely wants American multinationals to prosper in mainland China, it also wants them to stay in China and hire as many Chinese as possible. Anything counter to that goal would fall on deaf ears in the Great Hall of the People. Beijing is not making it easier for American companies and their joint venture partner to manufacture widgets in Vietnam instead.

But by comparison, some Senate leaders want to pay China importers back for their failure over the past two years to find alternative sources of supply or invest in a partner to retool to make that supply in the future. The tariff never asked for companies to manufacture in the U.S.  They could have found partners in Mexico, India, or southeast Asia. They stayed glued to China. And the Senate bill would reward them for that decision.

Since the Senate bill passed, industry groups subject to other tariffs smell blood in the water.

On Wednesday, 33 U.S. trade associations representing a wide range of sectors–from manufacturing and agriculture to alcohol and consumer products–released a letter calling for the termination of Section 232 steel and aluminum tariffs that have been in place since 2018.

The associations’ letter builds on a separate letter from 300-plus U.S. manufacturing companies who last month requested that the Biden administration put an end to these tariffs.

Unless the House bill is radically different than the Trade Act of 2021 provision in the Senate China bill, then the White House will be the last line of defense. The Executive Branch has always managed the tariff situation on China, and should continue to do so.