The United States Government Accountability Office (GAO) released a report evaluating the U.S. Trade Representative’s (USTR) Section 301 tariff exclusion program. The GAO evaluated the processes the USTR used tariff exclusion requests and extensions and explained how the USTR evaluated those exclusion requests and extensions. Ultimately, the GAO recommended that the USTR completely document the internal procedures it used to make Section 301 tariff exclusion and extension decisions. The key findings of this study are as follows and shed some light on the opaque process that frustrated many importers who sought relief from the tariffs.
The USTR Did Not Fully Document Its Internal Procedures for the Exclusion Process or the Extension Review Process
While the USTR documented certain procedures for the public to submit exclusion requests in Federal Register notices, the USTR did not fully document its procedures for all internal procedures, including its procedural steps, timelines, and roles and responsibilities. The GAO also found that the USTR never documented its internal procedures for deciding any extensions. The GAO found that without fully documenting its internal procedures for its exclusion and extension processes, USTR lacks reasonable assurance it consistently conducted its reviews.
The USTR Used Five Factors to Evaluate Exclusion Requests, But Denied Most Exclusion Requests
The USTR evaluated each exclusion request on a case-by-case basis using five factors. According to USTR officials, they examined the totality of the evidence when considering these factors and no one factor was essential to grant or deny an exclusion request. Below is a list of the factors and the information considered by officials in evaluating the factor.
· Availability - Whether the product is available only from China.
o If the requester demonstrated that the product was available only from China, the USTR considered granting the request.
o The USTR reviewed whether the product was subject to an antidumping or countervailing duty because these duties indicate the product was available domestically.
o Highlighting economic infeasibility of domestic sourcing was not enough to establish lack of availability from third-country sourcing.
· Severe economic harm - Whether the imposition of additional tariffs would cause severe economic harm to U.S. interests.
o USTR officials did not specifically define what they meant by “severe economic harm.” Instead, they applied their judgment by considering the size of the requesting company’s operations, level of imports, and ability to absorb the tariffs.
o The USTR did consider possible cumulative effects of these tariffs for a company, particularly when it reviewed multiple requests from the same company.
o USTR officials also considered possible harm to other U.S. interests. For example, if the tariff on a product, such as a health-care product, would negatively affect public health, welfare, or safety, or result in severe economic harm to a specific U.S. industry.
o Claims that the tariffs would cause job loss where there was no specific evidence were insufficient.
o Requests where the importer showed no recent imports from China were denied for failure to show severe economic harm
· Strategic importance to China - Whether the product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
o While requesters had an opportunity to comment on this factor, the USTR relied on its own analysis to determine if the particular product was strategically relevant or related to “Made in China 2025” or other Chinese industrial programs.
· Objective of the Section 301 investigation - Whether the exclusion would undermine the objective of the Section 301 investigation.
o USTR officials said they rarely denied exclusion requests based on this factor unless the requesters were Chinese state-owned entities.
· Administrability - Whether the request defines the product with sufficient precision for the exclusion to be administrable by U.S. Customs and Border Protection.
o Requests were denied when the requester did not provide sufficient information in order to draft a carve out that would distinguish the requested product form others in the same category.
o Requests were also denied if CBP determined they were not administrable. For example, if the product could not be classified within the product category specified.
Ultimately, the USTR denied 87% of the approximately 53,000 exclusion requests. The primary reason for denials was a failure to show economic harm.
The USTR Used Three Factors to Evaluate Extensions, But the USTR Did Not Extend Most Tariff Exclusions
Of the approximately 2,200 exclusions granted, the USTR only extended 25% and let the exclusions expire for 1,660 previously excluded products. According to the USTR officials, they made extension decisions based on three factors—availability, severe economic harm, and the objective of the Section 301 investigation. The factors of administrability or if the product was strategically important to “Made in China 2025” or other Chinese industrial programs were evaluated as part of the original exclusion determination.
For availability, the USTR considered whether the excluded product remained available only from China. They looked for global supply chain changes or industry development and any attempted sourcing from the U.S. or third countries. Where the public comments demonstrated that the excluded product remained available only from China, the USTR considered granting the extension.
For severe economic harm, the USTR considered commenters’ explanations of the harm, whether Chinese suppliers had lowered their prices for products covered by the exclusion following the imposition of tariffs, the commenter’s gross revenue, and if the Chinese-origin product was sold as a final product or an input used in the manufacturing of other goods. If the public comments did not demonstrate that the tariffs would cause severe economic harm to U.S. interests, the USTR did not consider extending the exclusion.
For the Objective of the Section 301 factor, the USTR officials said they examined the public comments on extending a particular exclusion to see if entities partially or wholly owned by the Chinese government had submitted them. If Chinese-state owned enterprises had submitted the public comments, the USTR did not consider extending the exclusion.
The GAO study stemmed, in part, from the questions about transparency and fairness of raised by U.S. businesses and members of Congress. The report provides an important recommendation that the USTR completely document the internal procedures it used to make Section 301 tariff exclusion and extension decisions. With Congress pushing for the Section 301 exclusion and extension process to resume, it is critical for the USTR to have a manageable system to evaluate requests in a way that is consistent and fair.