Section 301 of the Harmonized Tariff Schedule is Becoming a Crowded – and Confusing – Place

Two major auto makers contacted their supplier in Tennessee one recent morning, giddy with excitement. The United States Trade Representative (USTR) had apparently granted an exclusion from the Section 301 tariffs on Chinese goods for an automotive anti-vibration component which the Tennessee firm imported. Indeed, the Tennessee company had applied for an exclusion, under heading 7326 of the Harmonized Tariff Schedule (HTS) pursuant to a Customs classification ruling it had received for that product. However, USTR had not granted the company’s exclusion request; rather, it had granted a request from an Indiana firm – the Tennnessee company’s direct competitor — who had classified the component (incorrectly, according to Customs) as an auto part under HTS heading 8708.

The Tennessee firm took this as a good omen that its own exclusion petition, for the exact same product, would be approved. Alas, a few days later, it was denied, with no explanation from USTR.

Suddenly, the Tennessee firm was in crisis. USTR’s actions had placed it at a 25% landed cost disadvantage relative to its direct competitor. Could the Tennessee company avail itself of its Indiana competitor’s exclusion? That would mean disregarding the Customs ruling classifying the product under Heading 7326, and potentially get the company in hot water with Customs.

Stories like these are becoming increasingly common, as USTR, sifting through tens of thousands of petitions for exclusions from Section 301 tariffs, renders its product- and petition-specific decisions, some of which are inconsistent.

There is no formal process for USTR to revise or reconsider its exclusion decisions. Indeed, in the case noted above, the agency could conceivably wash its hands of the problem, saying that it was a tariff classification issue to be decided by Customs.

Problems like this are merely at the tip of the iceberg when USTR, in its exclusions process, wittingly or unwittingly engages in selecting “winners” and “losers”. But for a company that suddenly finds itself at a 25% disadvantage versus a direct competitor, it presents an immediate emergency that requires immediate resolution.

Even bigger problems are caused by the language in the granted exclusions themselves.

USTR has indicated that any firm whose product fits within a granted exclusion may take advantage of that exclusion, even if did not petition for it. Thus, many importers face the question of determining whether their products falls within the scope of a granted exclusion. However, many of the exclusions use terms not typically found in tariff provisions, as well as vague or even nonsensical phrases. For example, one exclusion provides for “printer maintenance kits” which “consist” of two or more parts provided for in a given 10-digit statistical subheading of the tariff schedule. This language is fraught with interpretative problems. What is a “kit”? Is it different from a “set”, a term which is described in the tariff?  If the covered kit is one “consisting of” two or more specified components, does the inclusion of other components in the kit take it outside the scope of the exclusion?  Importers are left to guess.

Another significant problem is that most exclusions are tied to ten-digit statistical subheadings of the HTS. However, ten-digit statistical subheadings are not part of the legal text of the tariff. They are not governed by the HTS’s rules of interpretation, and are normally not the subject of judicial construction. [Indeed, there have been cases when a ten-digit statistical provision describes a product by name, but the courts have ruled that the product is classified under a different tariff heading]. In interpreting the granted exclusions, what rules of interpretation will Customs or the courts bring to bear? This question is, for now, unanswered.

Moreover, the USTR’s exclusions, with their 10-digit statistical heading references, have now been codified in Chapter 99 of the HTS. This would appear to give the statistical subheadings some type of formal legal status. But still, the rules of interpretation for goods in other provisions of the tariff would seem not to apply. There will inevitably be disputes regarding whether goods fall into exclusion provisions – often with  25% tariff difference at stake – what rules will apply to resolving them?

As Section 301 tariffs remain in place longer, and as exclusions proliferate, USTR’s Section 301 exclusion process is creating a “shadow tariff schedule” in HTS Chapter 99, whose meaning and interpretation is almost completely unknown.

In the world of tariff assessment, a single word, or even a piece of punctuation, in a tariff provision can have far-reaching consequences, and affect billions of dollars in trade. It is no wonder that the World Trade Organization takes five (5) years to issue revisions to the six-digit international Harmonized System nomenclature. It is also the reason why the United States, before adopting an eight-digit subheading at the duty rate level, will typically subject the provision to extended interagency review and public comment.

In the Section 301 exclusion process, however, USTR is processing exclusion petitions in a relatively short time, with a staff of contract employees, and issuing decisions often in a matter of weeks or a couple of months, with little interagency review. The oft-overlooked HTS Chapter 99 is becoming a confusing and scary landscape that importers need to navigate – often with millions of dollars of duty assessments in the balance.