Section 301
The United States Trade Representative has authority under Section 301(b) of the Trade Act of 1974, as amended (Section 301 or 301), to investigate and take action to enforce trade agreements and address certain foreign trade practices that are unjustifiable, unreasonable or discriminatory and burden or restrict United States commerce.
Process
Any interested person may file a petition, which USTR will review within 45 days and publish a determination on whether to initiate an investigation. USTR can also self-initiate an investigation. If an investigation is initiated, USTR will publish a summary of the petition and provide the opportunity for the presentation of views on the issues, which should include a public hearing.
Once initiated, USTR must request consultations with the relevant foreign government on the issues being investigated.
If consultations do not lead to a resolution, USTR must determine whether US rights under a trade agreement are being denied; an act, policy or practice violates, or is inconsistent with, the provision of, or otherwise denies benefits to the United States under, any trade agreement; or, an act, policy or practice is unjustifiable and burdens or restricts US commerce; or, an act, policy or practice is unreasonable or discriminatory and burdens or restricts US commerce. If an act, policy or practice falls under the first two categories, action is mandatory; if it falls under the third category, action is discretionary depending on a number of factors.
The entire process takes about a year, unless it involves a trade agreement under which dispute settlement is required.
Remedies
USTR has a broad range of remedy options at its disposal to eliminate or compensate for the conduct in question, including, the suspension or termination of trade concessions; duties or other import restrictions and binding agreements to eliminate the act, policy or practice, or provide compensatory benefits.
Four-Year Review
After a Section 301 trade remedy has been in place for four years, the US Trade Representative must either terminate the trade relief or conduct a review of the matter if requested to do so by the relevant domestic industries. The statute requires that USTR review the effectiveness of the relief, other actions that could be taken to provide relief and the effects of such actions on the US economy, including consumers.
World Trade Organization Rules on Dispute Settlement
The strengthening of the dispute settlement process for international trade disagreements is one of the most significant accomplishments of the Uruguay Round negotiations. Under the Dispute Settlement Understanding (DSU) that applies to covered WTO agreements, members have agreed to settle disputes relating to those agreements according to the rules of the WTO and in proceedings before the WTO Dispute Settlement Body. Under the DSU, members should not be unilaterally deciding that violations of WTO obligations have occurred. The DSU includes fairly detailed procedures for bringing disputes to the WTO, including timelines, evidentiary rules, consultation requirements and the type of countermeasures that may be applied when violations of a WTO agreement are found.
Example
In 2017, at the direction of President Trump, USTR self-initiated an investigation under Section 301 to determine whether certain acts, policies, and practices of the Government of China related to technology transfer, intellectual property and innovation were unreasonable or discriminatory and burden or restrict U.S. commerce. Specifically, in its notice of initiation, USTR sought comment on the following four categories:
The Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies' operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies. Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.
The Chinese government's acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations with Chinese companies and undermine U.S. companies' control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non-market terms in licensing and technology contracts.
The Chinese government reportedly directs and/or unfairly facilitates the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.
The investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber-enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.
In 2018, USTR made the following findings:
China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from U.S. companies.
China's regime of technology regulations forces U.S. companies seeking to license technologies to Chinese entities to do so on non-market-based terms that favor Chinese recipients.
China directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate the transfer of technology to Chinese companies.
China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies to access their sensitive commercial information and trade secrets.
USTR imposed increased tariffs on imports of Chinese-origin goods in several tranches:
Tranche 1: Additional 25 percent ad valorem duty, effective July 6, 2018, on more than 818 products for a total trade value of $34 billion annually.
Tranche 2: Additional 25 percent ad valorem duty, effective August 23, 2018, on 279 products for a total trade value of $16 billion annually.
Tranche 3: Additional 10 percent ad valorem duty, effective September 24, 2018, which was increased to 25 percent ad valorem, effective May 10, 2019, on more than 5700 products for a total trade value of $200 billion annually.
Tranche 4: Additional 10 percent ad valorem duty, effective August 20, 2019, which was increased to 15 percent effective September 1, 2019 and then reduced to 7.5 percent on January 22, 2020, on more than 3200 products for a total trade value of $300 billion annually.
USTR also initiated a WTO dispute.
Tariff Exclusion Process
After the tariffs were initially imposed, USTR put in place a process by which interested parties, including trade associations and other persons, could submit requests for the exclusion of particular products from Section 301 duties. Other interested persons, including US domestic industries, were then afforded the opportunity to submit comments to USTR either supporting or opposing the request. Applications were required to include the following information with the exclusion request:
Information about the applicant, the product, the tariff designation and the applicant’s prior purchases of the product from China.
Whether the product is available only from China or is available from US- or third-country suppliers.
An explanation of why the product is not available outside of China, if that is the case.
Whether the imposition of the relevant duties will cause severe economic harm to the applicant.
The importance of the product to Chinese industrial programs.
Certain exclusions have been extended through May 31, 2025.
Biden Administration Expansion of Section 301 Tariffs
The Biden Administration has kept in place many of the Trump Administration’s Section 301 China tariffs and expanded the list of covered products as a result of its mandatory four-year review of the China Section 301 proceeding. In May 2024, the US Trade Representative announced new and increased tariff rates on Chinese steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes, and medical products – what the White House called “strategic sectors.” In a statement, Ambassador Katherine Tai, the US Trade Representative, said the new measures “serve our statutory goal to stop the PRC’s harmful technology transfer-related acts, policies, and practices, including its cyber intrusions and cyber theft.” The Administration characterized some of the targeted tariff increases as being designed to stop Chinese unfair trade practices in areas that are policy priorities for the Biden Administration, especially green technology. For example, the Administration explained tariff increases on certain Chinese steel and aluminum products as necessary to protect “high-quality, low-emissions” US steel and aluminum from being “undercut” by subsidized “artificially low-priced Chinese alternatives produced with higher emissions.” Notably steep tariff increases on Chinese products in the clean energy sector include an increase of the tariff rate on electric vehicles from 25 percent to 100 percent; increases in the tariff rate on lithium-ion EV batteries, lithium-ion non-EV batteries and battery parts from 7.5 percent to 25 percent; an increase in the tariff rate on Chinese solar cells, whether or not assembled into modules, from 25 percent to 50 percent; an increase in the tariff rate for Chinese natural graphite, permanent magnets and other critical minerals that the Administration said are key components in the EV supply chain from 0 to 25 percent; and an increase in the tariff rate on Chinese solar cells, whether or not assembled into modules, from 25 percent to 50 percent. US tariffs on a wide range of Chinese semiconductors were increased from 25 percent to 50 percent.
New Proposed Exclusion Process
Although many existing exclusions from the earlier tranches of China Section 301 tariffs have expired, the Biden Administration in its four-year review proposed a new exclusion process focused on certain types of machinery used in domestic manufacturing in a wide range of sectors. The Administration also proposed 19 temporary exclusions for certain solar manufacturing equipment.
China’s Reaction
China responded to each tranche with its own ad valorem tariffs on imports on products of US origin. China also filed a WTO dispute in 2018 and, in 2020, the WTO found that the US imposition of additional tariffs under Section 301 was a violation of US commitments under the WTO agreement. The United States has appealed this finding.
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.