US Officials Going to China for Negotiations on Potential Section 301 Tariffs Affecting Pharma, Devices

Medical devices and pharmaceuticals could see a "significant impact" if the tariffs are imposed, based on the proposed list released by the Office of the U.S. Trade Representative, said Amie Ahanchian, KPMG managing director, Trade and Customs Services, during a recent KPMG webinar. "What we see here is going to be an increased tariff of 25 percent on a lot of products in this category, including vaccines, antibiotics, insulin," as well as defibrillators and pacemakers, she said. Many tariff lines that would be subject to the tariffs are currently duty free, so importers of these items "may not have ever considered a customs planning strategy because there were no duties to mitigate in the current trade environment," she said.

Any Section 301 tariffs probably won't take effect before July, "based on what we're seeing on how the timeline is playing out," said George Zaharatos, a principal in KPMG's trade and customs practice. "Section 301 action may be taken as early as June," with another 30 days allowed before full implementation, he said. USTR will consider comments on the list submitted by May 11 and hold a hearing on the proposed tariffs on May 15 at the International Trade Commission in Washington. Requests to appear at the hearing are due April 23 and post-hearing rebuttal comments are due May 22. KPMG's Euroasia Group gives the likelihood of some type of Section 301 tariff going forward at 60 percent, he said.

If the visit by Mnuchin and Lighthizer ends with a pledge by China to buy an additional $100 billion in U.S. products, and the 301 enforcement action is dropped, that would be a disservice to businesses who want to sell in China, according to Erin Ennis, head of government affairs for the U.S.-China Business Council. Ennis spoke on a panel on Section 301 and the future of U.S.-China trade in Washington April 25. Ennis said that while the trade deficit is a legitimate issue to address with China, it has nothing to do with the intellectual property violations that the 301 process is supposed to address. "We have to get away from the idea there is one big thing China can do," she said.

Terence Stewart, managing partner of Stewart and Stewart law firm, agreed that a solution announced after one trip is not to be hoped for. "A negotiated solution that's arrived at quickly is not likely to be significant," he said. If the dispute can't be solved quickly, tariffs likely won't work to convince China to take its thumb off the scale for its homegrown industries, said Josh Kallmer, senior vice president for global policy at the Information Technology Industry Council. "The costs will be borne by Americans. It won't be quick. The odds of success are not extremely high."

But Stewart, the only panelist in favor of using tariffs as leverage, also is skeptical about the other panelists' suggestion that a longer-term negotiation with allies -- or actions at the World Trade Organization -- will change the course of state-backed enterprises in China. "None of them look like they will deliver a change in direction, largely because the Chinese have no real incentive to change," he said. "I totally understand where the rest of my panel is coming from" in opposing tariffs, he said. But he said 20 years of the business community counseling engagement with China has led to very limited progress in opening up the country to true competition. He said another agreement where the U.S. says "here's what we'd like to see," without tariffs, is not a serious attempt to solve the problems. "That may be better for business," he said.

Stewart said he doesn't think the USTR will be releasing the $100 billion in Chinese imports that would face tariffs if the Chinese retaliate after the first round of U.S. Section 301 tariffs anytime soon. "With the amount of pushback they got from businesses and Congress, it's not surprising," he said. "It may yet come, but I think it would only come if there's further deterioration." Moderator Eric Emerson, Steptoe & Johnson's international trade practice chairman, said that after Mnuchin and Lighthizer return, there may be "a little bit more clarity about the U.S.'s next steps."

In the meantime, importers should consider developing a "road map" of customs strategies, Zaharatos said during the earlier KPMG webinar. Quantifying the impacts of the Section 301 tariffs through data review should be the first phase of such an effort, he said. Such data, including from ACE, could also help in developing arguments for removal of certain products from the list, Zaharatos said. Importers that would like to comment on the list should outline multiple pieces of supply chain strategies, such as involvement in the Customs-Trade Partnership Against Terrorism and the possibility of sourcing changes, he said.

Importing companies also should gather technical information from involved engineers or procurement professionals to consider classification options for goods potentially subject to the duties, Zaharatos said. "Once you've classified your product, if there are any competing classifications" it may be possible to engineer a product to be outside the Section 301 list, he said. Documenting that process is important because "if Customs came in after the Section 301 duties were put in place and questions a change" and "you did not have the support, you're likely to be doing a lot of work on the back end." Avoiding a higher rate of duty should not be the basis for a classification, he said.

There are also ways to "lawfully reduce the value" of imported Section 301 goods by making certain to strip out non-dutiable fees and using first-sale programs, Ahanchian said. Documenting the rationales for valuation changes would also be important, she said. Use of foreign-trade zones is a way importers can manage timing of Section 301 duty payments, because the duties aren't due until the goods enter customs territory, she said.

Free trade agreement eligibility is also worth reviewing as it relates to new tariffs, Ahanchian said. For example, using net cost regional value content within NAFTA, "the additional customs duties, if your non-originating materials are imported from China, those additional customs duties could go toward the non-originating material in the NAFTA qualification and really throw off your eligibility," she said.