Court Issues Much Anticipated Decision on China Section 301 Tariffs

April 2022

BY

Damon V. PikePrincipal, Customs & International Trade Services

On April 1, 2022, the United States Court of International Trade (CIT) issued a 71-page decision in a case brought by U.S importers challenging the legality of additional duties assessed on Chinese origin goods pursuant to Section 301 of the Trade Act of 1974 (Trade Act).
 
The U.S. Trade Representative (USTR) had initiated an investigation, under the previous administration, into China’s trade practices regarding intellectual property rights, which concluded that various Chinese practices unfairly burdened U.S. commerce. As a result of these findings, USTR, at the direction of then-President Trump, imposed Section 301 duties ranging from 7.5% to 25% on Chinese products in four rounds of tariff implementations. The vast majority of the tariffs were imposed under the third round, i.e., List 3, initially assessed at 10% and subsequently increased to 25%.
 

Background and decision of the court

In the case before the CIT, the importers argued that the imposition of the third and fourth rounds of tariffs violated the terms of the Section 301 statute because they were imposed beyond the statutory time frame permitted for the government to take action relating to the USTR’s investigation and report and did not meet the requirements for modifications to pre-existing actions. Specifically, the imposition of the List 3 and List 4A tariffs was alleged to be unlawful because they did not relate to issues involving intellectual property, which was the initial reason for the implementation of the tariffs. However, the CIT ruled that the USTR did have the authority to apply additional tariffs after the conclusion of the original investigation due to China’s retaliatory tariff actions. The CIT stated that the initial investigation addressed China’s conduct related to the identified matters and not simply, as plaintiffs argued the “acts constituting the identified matters.”
 
Accordingly, the Court found that China’s imposition of duties on U.S. products to offset U.S. duties on Chinese-origin products resulted in an increased burden on U.S. commerce arising from acts that were part of the original action. In other words, the Chinese retaliatory measures permitted the modification of the USTR’s Section 301 actions—which in this instance were the imposition of additional tariffs. The CIT concluded that USTR exercised its authority consistent with the Trade Act when it issued the additional List 3 and List 4A tariffs.
 
The lawsuit also claimed that USTR violated the Administrative Procedures Act (APA) by failing to respond to the public comments filed in response to the List 3 and List 4 tariffs. The CIT stated that although a detailed comment-by-comment response is not the standard required by the APA, the USTR “was required to address comments regarding any duties to be imposed, the aggregate level of trade subject to the proposed duties, and the products covered by the modifications, all in light of section 301’s statutory purpose to eliminate the burden on U.S. commerce from China’s unfair acts, policies, and practices and subject to the specific direction of the President, if any.”
 
Although the Court acknowledged USTR’s “statements of basis and purpose” for its actions and reasons it deemed China’s ongoing and retaliatory conduct actionable, it found that USTR failed to demonstrate how it reached its decision to act and the manner in which it chose to act considering the concerns raised by the public about the impact of the duties on the U.S. economy and the potential availability of alternative courses of action. The Court found that USTR failed to address comments on the List 3 and List 4A tariffs, including the reasoning as to how and why products were placed on each list. The CIT further stated that, after the USTR requested comments on a range of issues, it was required to respond to the comments in a manner that enables the court to understand why the USTR reacted as it did. The CIT was unable to understand why USTR took its final actions in issuing the List 3 and List 4A tariffs.
 
In summary, the CIT found that the imposition of the List 3 and List 4A tariffs did not violate the Trade Act, although USTR failed to adhere to the requirements of the APA when it imposed these additional tariffs. Specifically, the CIT found that USTR’s failure to explain its rationale in the context of the comments received potentially left room for doubt about the legality of its action. However, in rejecting the argument to lift the tariffs pending an explanation by USTR of its reasoning, the Court stated that it may remand agency action for further consideration while allowing the action to remain in effect. The CIT acknowledged the potentially disruptive consequences of vacating the determinations of the List 3 and 4A tariffs when a complex and evolving process for negotiations remains ongoing. Accordingly, the court remanded the USTR’s decision imposing duties back to the agency for further explanation and consideration. Significantly, the Court noted that USTR may only further explain its justifications for the modifications and it may not identify any reasons that were not previously given unless USTR wishes to initiate new agency action and address the issue “afresh.”
 
Pursuant to the remand order, the USTR must file its remand results by June 30, 2022. The plaintiffs and the government defendants must file a joint status report within 14 days of the USTR’s filing and the court will file a new briefing schedule for the further disposition of this litigation.

 

How BDO can Help

BDO can assist importers with the preparation and filing of administrative protests for the refund of duties covered by the reinstated exclusions. BDO can also review the tariff classifications for products to determine if either a reinstated or previous tariff exclusion is or was available and if any refunds can be claimed based on the entry date of the merchandise.

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