Enforcing U.S. Trade Laws: Section 301 and China

Enforcing U.S. Trade Laws: Section 301 and China

Updated June 26, 2019
Enforcing U.S. Trade Laws: Section 301 and China
Overview
processes to force or pressure technology transfers from
Concerns over China’s policies on intellectual property
U.S. companies to a Chinese entity;
(IP), technology, and innovation led the Trump
 maintains unfair licensing practices that prevent U.S.
Administration in August 2017 to launch a Section 301
firms from getting market-based returns for their IP;
investigation of those policies. Consequently, the United
 directs and facilitates investments and acquisitions
States has implemented three rounds of tariff increases on a
which generate large-scale technology and IP transfer to
total of $250 billion worth of Chinese products, while
support China’s industrial policy goals, such as the
China has increased tariffs on $110 billion worth of U.S.
Made in China 2025 (MIC 2025) initiative; and
products. The Trump Administration has threatened to
 conducts and supports cyberintrusions into U.S.
increase tariffs on nearly all remaining imports from China.
computer networks to gain access to valuable business
What Is Section 301 and How Does It Work?
information.
Sections 301 through 310 of the Trade Act of 1974, as
Subsequently, the Trump Administration increased tariffs
amended, are commonly referred to as “Section 301.” It is
by 25% on three tranches of tariff products with combined
one of the principal statutory means by which the United
value of $250 billion worth of imports from China and has
States enforces U.S. rights under trade agreements and
threatened to boost tariffs on nearly all remaining products
addresses “unfair” foreign barriers to U.S. exports. Section
from China (valued at $300 billion). China has increased
301 procedures apply to foreign acts, policies, and practices
tariffs (at rates ranging from 5% to 25%) on $110 billion
that the USTR determines either (1) violate, or are
worth imports from the United States (see table and figure).
inconsistent with, a trade agreement; or (2) are unjustifiable
and burden or restrict U.S. commerce. The measure sets
Table 1. U.S.-China Section 301 Tariff Action
procedures and timetables for actions based on the type of
trade barrier(s) addressed. Once the USTR begins a Section
Ad
301 investigation, it seeks a negotiated settlement with the
Country
Valorem
Stated
foreign country concerned (either through compensation or
Imposing
Tariff
Imports
Tariff Actions and
an elimination of the particular barrier or practice. For cases
Tariff
Rates
Impacted
Dates
involving trade agreements, such as those under the
Uruguay Round (UR) agreements in the World Trade
U.S.
Implemented
25%
$34 bil ion
Organization (WTO), the USTR is required to use the
Tranche 1
7/6/2018
formal dispute proceedings specified by the agreement. For
China
Implemented
Section 301 cases (except those involving a trade agreement
25%
$34 bil ion
Tranche 1
7/6/2018
or an IPR issue) the USTR has 12 to 18 months to seek a
negotiated resolution. If one is not obtained, the USTR
U.S.
Implemented
25%
$16 bil ion
determines whether to retaliate (which usually takes the
Tranche 2
8/23/2018
form of increased tariffs on selected imports) at a level
equivalent to the estimated economic losses incurred by
China
Implemented
25%
$16 bil ion
U.S. firms from the foreign barrier or practice.
Tranche 2
8/23/2018
After the United States implemented the UR agreements
10% hike effective
U.S.
10%, then
and joined the WTO in 1995, the USTR still sometimes
$200 bil ion 9/24/2018; raised to
Tranche 3 25%
began Section 301 investigations but then brought the
25% by 6/15/2019
issues at hand to the WTO for dispute resolution. After
5% and10% hikes on
2010, the USTR brought all trade disputes involving WTO
5% and
9/24/2018; increased
members directly to the WTO for adjudication. The Trump
China
10%, then
to 10%, 20%, and
Administration’s use of Section 301, rather than solely
Tranche 3
$60 bil ion
10%, 20%,
25% on selective
utilizing the WTO dispute settlement process to address the
(4 lists)
and 25%
products, effective
issues of concern, is a departure from past U.S. practices.
6/1/2019
New U.S. Section 301 Measures Against China
On March 22, 2018, President Trump signed a
U.S.
Draft USTR notice
Memorandum on Actions by the United States Related to
Tranche 4 25%
$300 bil ion issued 5/13/19
the Section 301 Investigation. Described by the White
proposed
(action pending)
House as a targeting of China’s “economic aggression,” the
Sources: USTR and Chinese Ministry of Finance.
memorandum identified four broad policies that justified
U.S. action against China under Section 301. It said China
 uses joint venture requirements, foreign investment
restrictions, and administrative review and licensing
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Enforcing U.S. Trade Laws: Section 301 and China
Figure 1. Four Tranches of Implemented and
President Trump directed the USTR on June 18 to propose
Proposed Tariff Hikes under Section 301 Actions
a new list of products worth $200 billion that would be
subject to increased 10% tariffs if China retaliated against
U.S. tariff hikes, and he warned of additional tariffs if
China retaliated a second time. The first two rounds of U.S.
25% tariff hike measures went into effect on July 6, 2018,
(covering $34 billion worth of products) and on August 23
(on $16 billion worth of products). China implemented
comparable countermeasures on U.S. products. On
September 17, the Trump Administration announced a third
round of tariffs (at 10%, rising to 25% on January 1, 2019)
on $200 billion worth of Chinese products (effective
September 24). China responded by raising tariffs (by 5%
and 10%) on $60 billion worth of U.S. products.
A Temporary Trade Truce
On December 1, 2018, Presidents Trump and Xi met at a
Sources: USTR and Chinese Ministry of Commerce.
private dinner during the G20 Summit in Argentina.
Notes: U.S. tariff hikes at 25%, while China’s range from 5% to 25%.
According to a White House statement, China agreed to
China has not yet responded to the proposed U.S. fourth tranche.
make “very substantial” purchases of U.S. products and to
U.S.-China Trade Negotiations
begin negotiations on making structural changes to various
The two sides have conducted negotiations on the U.S.
aspects of its economy with the goal of achieving an
Section 301 investigation. These discussions have gone on
agreement in 90 days. President Trump agreed to suspend
to include issues beyond the four IP and innovation policies
the planned tranche 3 Section 301 tariff rate increases (to
cited by the Trump Administration.
25%) for 90 days, pending the outcome of intense bilateral
negotiations. On February 24, 2019, President Trump
On May 3-4, 2018, the two sides held high-level talks in
tweeted that progress in the trade talks been made and that
Beijing. The U.S. side released a draft Framework for
he would further delay the tariff hikes.
Discussion. It included calls for China to reduce the
Trade Conflict Resumes and Intensifies
bilateral trade imbalance by $200 billion over two years;
address each of the four practices identified in the Section
On May 5, 2019, President Trump tweeted that trade
301 findings; halt subsidies for the Made in China 2025
negotiations were going “too slowly” and that China was
initiative; remove foreign investment restrictions, make
attempting to “renegotiate” previous trade commitments.
China’s tariff levels comparable to U.S. tariff rates, and
He then ordered the tariff hikes under the third Section
remove certain nontariff barriers; improve market access
301tranche be raised from 10% to 25% and for the USTR to
for U.S. service providers and agricultural products; and
begin the process of increasing tariffs by 25% on nearly all
agree not to oppose, challenge, or take any other action
remaining U.S. imports from China, valued at $300 billion.
against the United States’ action, including in the WTO, if
On May 13, China announced it would increase tariffs on
China failed to live up to a framework agreement. On May
many of the products on its retaliatory third tranche. China
19, the United States and China released a joint statement
contends that trade talks have broken down because the
outlining progress on a number of trade issues. On May 21,
United States has “persisted with exorbitant demands,”
U.S. Secretary of the Treasury Steven Mnuchin stated that
including on issues concerning China’s “sovereign affairs.”
because of the agreement, the trade war had been put “on
A protracted and expanding U.S.-China trade conflict could
hold.” However, on May 29, the White House announced
sharply reduce bilateral commercial ties, disrupt
that it planned to move ahead with Section 301 action
international supply chains, and diminish global economic
against China by: (1) imposing 25% ad valorem tariffs on
growth. Data for the first quarter of 2019 show that U.S.
$50 billion worth of imports from China; (2) implementing
exports to, and imports from, China, dropped by 19.6% and
new investment restrictions and enhanced export controls
13.9%, respectively, year-over-year. Many economists
on Chinese entities and persons in regard to the acquisition
warn that imposing tariffs on nearly all products from
of “industrially significant technology” for national security
China could be costly to U.S. consumers and firms that
purposes (legislation was later enacted addressing these
depend on trade with China. In addition, China could
issues); and (3) continuing to pursue the WTO case against
further retaliate by curbing operations of U.S.-invested
China’s licensing policies. The White House further stated
firms in China, reducing its holdings of U.S. Treasury
it would request China remove “all of its many trade
securities, and curtailing rare earth material exports to the
barriers” and make taxes and tariffs between the two
United States. A study by the Organization for Economic
countries “reciprocal in nature and value.” A subsequent
Cooperation and Development estimated that current and
statement by the Chinese government said that the White
threatened U.S.-China tariff hikes could reduce U.S. and
House actions were “clearly contrary to the recent
Chinese GDP by 0.9% and 1.1%, respectively, by 2021-
agreement between the two sides,” and said it would not
2022 (relative to its baseline).
implement the market-opening measures it had pledged to
make while being threatened with tariff hikes.
Wayne M. Morrison, Specialist in Asian Trade and
On June 15, 2018, the USTR announced a two-stage plan to
Finance
impose 25% ad valorem tariffs on $50 billion worth of
IF10708
Chinese imports. When China on June 16 issued its own
two-stage retaliation plan against the United States,
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Enforcing U.S. Trade Laws: Section 301 and China

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