China's Tariff Exclusion Program Suggests It's Ready for 'Long-Term Fight,' Trade Expert Says

Speaking during a May 14 livestream on the U.S.-China trade war, Mento covered some difficulties U.S. exporters may face when applying for tariff exclusions from China. “Whenever you hear about an exclusion process coming out for additional duties, that is an indication of an expectation of a long-term fight,” Mento said. “Because you wouldn’t put out an exclusion process unless you expected to be able to get in that ring and gut it out for quite a while.”

In a May 13 press release, China’s Ministry of Finance said it will review applications to exclude some “eligible commodities from the scope of tariffs,” according to an unofficial translation. Mento said that process may prove “difficult” for companies. “I don't think the Chinese are going to make it easy on anyone,” he said. Some of the hardships companies must prove -- on a product-by-product basis -- are that the tariffs are causing them to struggle to find “substitute products,” leading to “severe economic damages,” according to a May 14 report from Xinhua, the official Chinese state-run news agency.

Exporters to China must prove the tariffs are directly leading to “some kind of structural problem” within China, Mento said, or are causing a significant impact on a relevant Chinese industry. This includes “injuries” to Chinese companies. “So other than the U.S. exporter, there has to be a provable financial injury to the Chinese importer,” Mento said, adding that there is confusion on how those hardships are defined. “No one has talked about the calculus required to prove that yet,” he said. Mento said companies most likely to receive exclusions are those with “direct relationships” to vital industries such as the military, infrastructure or “big huge, strategic industries that [the Chinese] feel they simply have to have an American product coming in for.”

And unlike U.S. exclusion programs, which sometimes grant exclusions to companies for the “entire enduring trade issue,” Mento said China will require companies to reapply after one year if their application is accepted, a condition that further points toward China’s preparation for an extended tariff battle. “Why else would you have put that out unless you’re considering a long-term fight?” Mento said of the limit on exclusions. “I think you’re going to see a willingness by the Chinese to hunker down if they have to.”

Another area of concern in the exclusion program is possible violations of the Foreign Corrupt Practices Act, Mento said, which could occur among U.S. or European companies “working through” the exclusion process with their Chinese customers. “Anytime I hear about a Chinese government program with duty exclusions, I’m going to immediately get concerned about red envelopes flying all over the place and people asking for favors,” Mento said. “I’m a little interested to hear how they plan on managing graft and managing corruption in regards to this.”

Mento strongly urged U.S. companies to submit public comments to the Office of the U.S. Trade Representative, which on May 13 published a notice in the Federal Register seeking comments on hiking tariffs on certain Chinese goods. Written comments are due June 17, the same day the Section 301 Committee plans to hold a public hearing at the International Trade Commission. Mento said U.S. companies should attend and be prepared with detailed statistics, including how much product they import under the tariffs, the resulting revenue and how drastically the tariffs may affect their business and employees. “If you don't know how to do it, reach out and get help. But you need to get your voice heard,” Mento said. “If you’re not doing it, it’s your own fault when you get slapped with these duties.”