Section 301 Tariffs Shouldn't Apply to Wholly Owned Factories in China, Industry Executive Says

More than 1,000 of the 1,300 tariff lines on the list of products that could be affected by Section 301 tariffs would impact General Electric's operations, but the company is asking for just 34 items to be removed from the list. On May 16, during the second day of the International Trade Commission's public hearing to help it refine the list of products subject to 25 percent tariffs, Karan Bhatia, who leads GE's government affairs and policy office, suggested the committee exclude intra-company inputs from owned and controlled Chinese factories because those don't involve forced technology transfer, something the Section 301 tariffs are meant to address. He suggested items that have high U.S. content by value that come from China also should be excluded.

Bhatia said the 34 parts they'd like removed from the list are for jet engines or for medical equipment, such as MRI machines built in Wisconsin. For all Section 301 tariffs, he asked that duty drawback be available. GE exports 25 percent of the MRI machines; the vast majority of jet engines are sold to foreign customers. Overall, 60 percent of what GE produces in America is exported.

Nearly every witness, representing clothing to auto parts to refrigerators to marine motor sectors, said they could not quickly shift sourcing to Mexico, Vietnam or other countries, nor could they quickly buy from U.S. producers. More broadly, Eva Hampl, director of trade at the U.S. Council for International Business, noted that more than 80 percent of tariffs on the list hit industrial inputs, and that's a problem. That choice "can undermine the most competitive sectors of U.S. manufacturing," she said.

Foreign-trade zones are responsible for more than 5 percent of U.S. exports, according to Erik Autor, president of the National Association of Foreign-Trade Zones. Autor said that when manufacturers' inputs are taxed, it's an incentive to import finished products instead of doing assembly in America. The establishment of foreign-trade zones was designed to equalize duties on U.S.-made and foreign-made items, he testified, allowing manufacturers in FTZs to import inputs at the same duty level the finished item faces, if the input's duty rate is higher than the finished product.

"Finished goods approved by the FTZ board must not be considered foreign for U.S. customs purposes," he said. In his written testimony, Autor said they're concerned that the language is not clear enough and that if items such as duty-free centrifugal pumps under subheading 8413.70 assembled in an FTZ incorporate an imported a Chinese motor classifiable in subheading 8501.51 or 8501.52, instead of paying 25 percent just on the motor, the company might have to pay 25 percent on the completed pump, which is also on the Section 301 list. "This anomalous situation arises because, the highest-valued foreign status component used to make the pump (i.e., the motor) is of Chinese origin, and according to guidance from ... CBP and U.S. Census, the country of origin of the highest-value component must report on the entry for statistical purposes only. The result is that both the country of origin and the HTS number on the FTZ entry of the finished pump will flag it as subject to the additional Section 301 duties, even though, under U.S. customs law, the pump originates in the United States because it undergoes a 'substantial transformation' in this country."

And, he said, if Section 301 tariffs are levied, it's essential that the proclamation does not repeat the language used in the Section 232 proclamation. That proclamation said that steel and aluminum brought into FTZs before the tariffs took effect under privileged foreign status would be taxed when they enter into U.S. commerce. That approach had never been taken in any earlier proclamation, Autor said, and contravenes language in the law establishing FTZs.

In answering questions from the panel, Autor elaborated that the 232 proclamation language "attempts to do a reach-back on goods that were already in a foreign-trade zone prior to the date of the duties." Privileged foreign status always meant that the duties paid when the goods left the FTZ were those due at the time that the item was imported to the FTZ, not when it exited.

On the second day of the public hearing, as on the first, (see 1805150044), more companies asked that finished products be added to the 301 list, such as LED displays, fence posts and high voltage cables. The latter two businesses are affected by 232 tariffs, executives said, and final product tariffs are needed to counteract the additional raw materials disadvantage they now have compared to exporters. Charlie Murrah, president of the power systems and solutions group Southwire Company, said without cables' addition to the list, and given the aluminum price increases from sanctions on Russian aluminum and Section 232, his company would need to cut 35 percent of its 2,500-strong U.S. workforce.