Section 232

What You Need To Know

• This Likely Won’t End Soon. The economic relationship between the United States and China, the two largest economies in the world, has been characterized by trade conflict for decades. That tension has escalated in recent years, with US concerns extending beyond China’s unfair trade practices to the national security implications of China’s access to US technology, direct investment in the United States and US critical infrastructure such as energy and telecommunications.

  Chinese companies have been penalized  for  enabling Russia to evade US sanctions over its invasion of Ukraine; the Federal Communications Commission has taken action to bar Chinese sales of video surveillance equipment and Chinese telecom giants Huawei and ZTE have been banned from US telecommunications equipment sales in the United States; the United States also has tightened export controls on sales of high-end semiconductors to China; the United States has restricted outbound investment to China and the Biden, Trump and Obama Administrations have taken action under CFIUS to stop certain Chinese investments in the United States; and, USTR has initiated a Section 301  investigation “of acts, policies, and practices of the People’s Republic of China (PRC) targeting the maritime, logistics, and shipbuilding sectors for dominance.”

  USTR recently determined in its Section 301 four-year review that “despite some positive developments, China persists in efforts to transfer technology from U.S. companies and the burden of China’s technology transfer-related acts, policies, and practices on U.S. commerce has increased.”  With its focus on technology and national security, the so-called US-China trade war seems to have morphed into a US-China technology cold war, with a focus on the uses of high technology and which country will dominate the next generations of IT. Nevertheless, despite these issues, US goods and services trade with China totaled an estimated $758.4 billion in 2022. Exports were $195.5 billion; imports were $562.9 billion. The US goods and services trade deficit with China was $367.4 billion in 2022.  US manufacturers, importers and exporters that compete with or do business with China need to be prepared for the landscape to keep changing. Businesses can take the initiative by diversifying supply chains and taking part in the Section 301 process. 

• Tariffs Are Paid by Importers and Consumers, Not Foreign Producers. As noted above, tariffs under Section 301 are ultimately paid by the US importer of record, and usually passed on to US consumers. The ITC in its study of the Economic Impact of Section 232 and 301 Tariffs on U.S. Industries notes that its own findings and those of outside studies indicate that “the cost of section 301 tariffs have been borne almost entirely by U.S. importers. Chinese exporters have largely maintained the same prices and U.S. importers have absorbed the costs of the tariffs through a combination of less-favorable margins for sellers and higher prices for consumers or downstream buyers.”  US businesses anticipating new or increased tariffs should consider adding suppliers who are domestic or from countries not subject to tariffs to their supply chain. 

• Section 301 Tariffs Disrupt Supply Chains.  Downstream US industries that rely on products subject to Section 301 tariffs may have difficulty finding suitable suppliers, especially for products with exacting specifications.  Given the longevity and scope of the Section 301 tariffs and the growing intensity of the US-China technology cold war, US industrial consumers that rely on Chinese inputs or retailers that sell final products made in China should anticipate possible long-term supply chain disruptions in the future and where possible look for alternative suppliers.  The ITC in its report on the impact of the Section 232 and Section 301 tariffs cited numerous examples of importers complaining that the inputs they needed to make their product were either not made outside of China or not made to exacting specifications.  For example, the ITC cited industry testimony indicating that “products such as information and communication technology devices …have complex supply chains because of strict specification and prequalification requirements from purchasers, making it difficult to switch sourcing in response to section 301 tariffs.”  Other industry groups reported similar experiences in comments to the ITC, including communications equipment and electrical equipment manufacturers, the latter of which indicated problems sourcing batteries. 

• US Exporters May Face Retaliation in Response to Section 301 Tariffs.  China responded to each tranche of US Section 301 tariffs with retaliatory tariffs against US exports, covering an estimated $106 billion of US  products. The Chinese retaliatory tariffs covered a broad range of sectors, including fishery and forestry products, industrial products, almost all US agricultural products exported to China and, for a short period, autos.  The tariffs were highly concentrated in the agricultural sector, which is not surprising in that China is the largest export market for US farmers. A 2022 Department of Agriculture study estimated that the U.S. agricultural export losses due to Section 232 and Section 301 retaliatory tariffs reached $27 billion through the end of 2019. The report concluded that more than $25 billion of that was due to Chinese retaliation, with the largest losses suffered by US exporters of soybeans, sorghum and pork, in that order.  Mexico, Canada, Turkey, Russia, the European Union and India imposed tariffs on US exports in retaliation to the US Section 232 tariffs. US companies subject to retaliatory tariffs should monitor Section 301 cases carefully and make contact with the Office of the US Trade Representative, the Commerce Department and their congressional representatives before tariffs are finalized, especially as certain industries are predictable targets for retaliatory tariffs. 

• Applying for Exclusions. Those ultimately seeking exclusions from the Section 301 tariffs announced in May 2024 should follow the process closely, keeping an eye on deadlines and in this case on the tariff categories open to exclusions.  USTR has generally implemented this process through an on-line portal.  

• The WTO Ruled Against the United States.  The WTO panel ruling against the United States was a decision based on China’s WTO challenge of the Section 301 tariffs, which the United States imposed without getting authorization to do so from a WTO panel.  As such, the focus of the case was on whether the United States’ unilateral imposition of tariffs violated the provisions of the WTO.  The panel held that the Section 301 duties violated the WTO requirement that tariffs and trade rules apply equally to the products of all signatories—a concept known as most-favored-nation treatment.  The panel also found that the tariffs exceeded the rates to which the United States was bound under the Agreement. The panel rejected US arguments that the Section 301 tariffs fell within an exception to these provisions of the Agreement because “China's acts, policies, and practices addressed in the relevant Section 301 Report amount to state-sanctioned theft and misappropriation of U.S. technology, intellectual property, and commercial secrets which violates the public morals prevailing in the United States.”  The United States was also criticized by a number of US trading partners for taking a unilateral approach rather than using WTO dispute settlement. The United States appealed the ruling of the WTO Section 301 panel in October 2020 and this appeal is still outstanding.