The Sky's The Limit – Yet More Section 301 Tariffs On China

Sheppard Mullin Richter & Hampton


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On May 14th at 5 am in DC, the White House released its decision on the new section 301 tariffs.
China International Law
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On May 14th at 5 am in DC, the White House released its decision on the new section 301 tariffs. There is a 100% tariff on Chinese EVs effective this year (which is in addition to the usual 2.5% import duty on cars).

The tariff rate on Chinese lithium-ion EV batteries will increase from 7.5% to 25% in 2024, while the tariff rate on lithium-ion non-EV batteries will increase from 7.5% to 25% in 2026. The tariff rate on Chinese battery parts will increase from 7.5% to 25% in 2024.

The tariff rate on Chinese natural graphite and permanent magnets will increase from zero to 25% in 2026. The tariff rate for certain other critical minerals will increase from zero to 25% in 2024. The delay of the graphite tariff to 2026 fits with the need for U.S. industry to continue using Chinese graphite for some time until alternatives are developed. That reality was already reflected in the recently published IRS rules for tracing of EV battery minerals for IRA Section 30D compliance purposes.

EVs from China were previously subject to a total 27.5% tariff, which was high enough to prevent a significant volume of Chinese EV imports into the U.S. such as Europe has seen. Europe is expected to impose steep AD/CVD tariffs on Chinese EVs in the coming months. The U.S. Administration wants to make it prohibitively expensive for Chinese EV producers to increase EV exports to the U.S. It was relatively easy for the Administration to do this for EVs because Chinese producers do not have significant market penetration in the U.S. EV market. The appearance of the Chinese Seagull priced at around $12,000 in China has been alarming for American automakers and politicians since that price is a fraction of what U.S. EVs cost.

The Administration appears to be willing to accept the indirect inflationary pressure that will come from enabling domestic EV producers to set their prices without worrying about Chinese EV competition. The section 30D EV tax credit in the IRA should ease the effect of this inflationary pressure somewhat for U.S. consumers. Republicans do not object, of course, to a sharp increase in Chinese EV tariffs. Former President Trump has already spoken of imposing a 60% tariff on all Chinese goods, and the Republicans have been opposed to Biden's EV promotion in any case both because of the government spending it has required and their willingness to see the continued sale of gasoline powered vehicles.

The question of batteries and their components is more intricate. The Administration wants to promote production of batteries in the U.S. as well as the battery mineral extraction that can be done in the U.S. without serious damage to the environment, along with mineral sourcing from trading partners in the Americas and elsewhere to avoid reliance on Chinese sources as much as possible. We have already seen, however, the use of gradual "phase-in" rules by the IRS (e.g., for graphite) that take account of the current supply limitations which will take years to overcome. The Administration's decision to set a date of 2026 for the 25% graphite tariff to take effect is designed to give the U.S. graphite industry the assurance it needs to develop alternative sourcing, while enabling U.S. battery manufacturers to continue sourcing the graphite they need to grow their industry.

Other Products

The new China Section 301 tariffs also affect certain steel and aluminum products which will now be subject to a 25% duty in 2024, semiconductors which will be subject to a 50% duty by 2025, solar cells which will be subject to a 50% duty this year, ship-to-shore cranes which will have a 25% duty this year, syringes and needles which will have a duty of 50% this year, certain personal protective equipment, including some respirators and face masks, which will have a duty of 25% this year, and rubber medical and surgical gloves which will have a 25% duty in 2026.

But what about Mexico?

The part of this ongoing China trade story that has not yet been fully told is how the United States will deal with the attraction of Mexico. During the Trump Administration, the U.S. special tariffs on steel (under Section 232) gave rise to a legal dispute with Mexico which was resolved in 2019 by means of a "Joint Statement," one term of which requires both parties to "prevent the importation of aluminum and steel that is unfairly subsidized and/or sold at dumped prices." The Joint Statement also states that if U.S. imports of aluminum or steel products from Mexico "surge meaningfully beyond historic volumes of trade over a period of time" the U.S. can impose duties of 25% for steel and 10% for aluminum. This threat provides leverage that the U.S. has been using to force Mexico to increase its tariffs on Chinese imports. The Mexican Economy Minister Raquel Buenrostro recently confirmed that Mexico will update a tariff decree from August last year "to combat unfair trade and all products that arrive subsidized, at prices below production costs," including on steel, aluminum and electrical materials. She said this new list will amount to a total of 540 tariff lines (an increase from the current 392 tariff lines subject to these tariffs). This announcement came shortly after Mexico imposed tariffs of 31% on steel nails from China and 3.68%-12.35% on steel balls from China, which followed a public statement by USTR Katherine Tai in February that there was an "urgent need" for Mexico to act immediately against "the increase of Mexican exports of steel and aluminum to the U.S. and the lack of transparency regarding Mexico's steel and aluminum imports from third countries."

The issue of Chinese companies supplying and investing in Mexico as a means of entry into the U.S. automotive market has attracted a lot of attention in Washington. Reports have indicated that the increase in Mexican exports to the U.S. has been approximately matched by a simultaneous and closely correlated growth in Mexican imports from China, especially in the automotive sector. There have been reports of Chinese automakers looking to build plants in Mexico, but Mexico last month announced that it will not provide its usual low-cost public land or tax cuts to Chinese companies to help them set up automotive production in Mexico.

Democrats and Republicans are also aligned on this issue. Former President Trump has said that if he returns to the White House he will impose a 200% tariff on cars manufactured in Mexico by Chinese companies, and Republican Senator Marco Rubio introduced a bill recently to attack the problem by denying USMCA trade benefits in specific cases of Chinese production in Mexico.

The USMCA rules of origin are due to be reviewed by the United States, Mexico and Canada in 2026, and one can expect the United States to push for additional, tougher rules of origin in the automotive sector. If President Biden is re-elected, one would expect this to be one facet of his effort to help build the U.S. EV and EV battery industry by making it harder for Mexican auto manufacturing plants to source content from China the way they currently do. If former President Trump is elected we should expect much of the same, except that he will not be focused on EVs but automotive production in general.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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