Section 301 Tariff Exclusions and the Worrisome Pattern of Trade Restrictions

The current trade war with China isn’t dominating the headlines lately, but the tariffs it has caused nevertheless have an outsized impact on American businesses and taxpayers. These harmful tariffs severely impact the bottom line of businesses throughout the country, as well as the average consumer.

The Office of the United States Trade Representative (USTR) has set up an exclusion process to minimize impacts on American businesses, but this has had little real effect because most requests have been denied. Moreover, a review by the Government Accountability Office (GAO) raises concerns about the fairness of the review process. Ultimately, the exclusion process is a band-aid covering a bullet hole.

Section 301 Tariffs and Administration of the Exclusion Process

In 2018, the Trump administration began to impose tariffs on Chinese goods under Section 301 of the Trade Act of 1974. These tariffs were implemented sequentially in four lists of goods and ultimately came to affect nearly two-thirds of U.S. imports from China. Tariffs are, by definition, taxes on imports, and they are paid by Americans. Because tariffs distort the economy and empower the government to pick winners and losers based on their political clout, economists are nearly unanimous in their opposition to trade barriers. Nevertheless, GAO estimated that “by the end of 2020, the U.S. government had collected almost $71 billion in such tariffs.” 

Responding to criticism about the impact tariffs were having on supply chains, USTR set up an exclusion request process for firms that wish to avoid the tariff for Chinese imports. For a business to be eligible for a tariff exclusion, it must demonstrate two things: that the products are only available from China and that the tariffs will cause “severe economic harm.” In theory, this process could ameliorate some of the negative impacts of tariffs, but in practice, it leads to a lot of paperwork and relatively little relief. Between 2018 and 2020, the USTR received 53,000 exclusion applications from firms. The very fact that so many firms must apply to be excluded demonstrates the widespread harm of Section 301 tariffs on American business. On the plus side, GAO noted that the exclusions that were granted provided $14 billion in relief. On the other hand, a whopping 87 percent of the requests were denied. 

Furthermore, USTR has been inconsistent about the criteria, evidenced by the aforementioned GAO report. For example, some businesses that demonstrated severe economic harm were accepted even though they failed to prove that the goods in question were only available from China.

GAO pointed out other problems too. One major one is that USTR did not properly document its processes and procedures. These steps are necessary to ensure a consistent and fair review process. Without this basic standard, it is impossible to establish consistency and fairness as the main criteria in determining which companies' requests were granted. As GAO wrote, "Federal internal control standards state that agencies should document their procedures to ensure they conduct them consistently and effectively, and to retain knowledge. Without fully documented internal procedures, USTR lacks reasonable assurance it conducted its reviews consistently. Moreover, documenting them will help USTR to administer any future exclusions and extensions."

Exclusion Process Compliance Burdens Are Still Underestimated

GAO only investigated the USTR’s exclusion request review process, but as NTUF has warned, there are also problems associated with requesting exclusions. Applying for exclusion is no easy feat, and firms have a right to know how their application is reviewed. Businesses must file appropriate paperwork with the USTR, costing money and time that could be spent elsewhere. Additionally, the USTR drastically underestimated the time and dollar cost of applying, as referenced by the NTUF in 2019: “[USTR] initially estimated applicants’ cost to be 60 minutes ... USTR has revised its cost estimates to 120 minutes and roughly $200. However, this is still likely understating the actual paperwork burden.” Comments from small businesses to NTUF in 2019 indicated that the USTR was still underestimating the compliance burdens of the exclusions process. Many firms do not have the means to spend hours filing legal forms. In fact, this disproportionately affects small businesses who have less resources to devote to navigating red tape

Effects of U.S. and Foreign Tariff Expansion

What do these tariffs mean for the American taxpayer? Broadly speaking, consumer products will become more expensive. It’s obvious how this would occur as a result of tariffs imposed by the U.S. government, but other factors contribute to rising consumer prices as well. For example, the imposition of U.S. tariffs on China has caused a retaliation,  with China enacting tariffs on U.S. products. These retaliatory tariffs heavily impact certain areas of the U.S. economy such as agriculture. In 2019, the U.S. exported $7.87 billion worth of soybeans, accounting for 7.64% of all exports to China. This is down from $10.6 billion in 2015, illustrating the real impact that foreign tariffs have on American businesses. Additionally, this led to a new direct welfare program; through the Market Facilitation Program the USDA paid $23 billion to agricultural producers to mitigate the fallout from the trade war.

Tariffs are a lose-lose situation for nearly everyone involved, which explains why the USTR provided temporary relief from tariffs for medical products needed to protect people from COVID-19. Last March, the USTR announced 99 medical exclusions through September 30, 2021. The agency is now seeking public comment on whether these should be extended further. 

The Future of Section 301

The Trump administration held tariffs as one of its cornerstone policies. The current administration has an opportunity to reverse this harmful policy. The current United States Trade Representative, Katherine Tai, has stated: “The Biden-Harris administration and USTR are conducting a comprehensive review of U.S.-China trade policy.” It remains to be seen what the current administration will change when it comes to tariff policy. However, this review will hopefully come to the conclusion that the Trump administration’s 301 tariffs ultimately hurt Americans instead of helping them.