Many U.S. manufacturers that rely on Chinese-origin goods have been paying steep tariffs of up to 25% on the import of Chinese goods due to special Section 301 tariffs. Because these tariffs were applied to the vast majority of Chinese-origin imports, the special tariffs cover many products that have medical uses or are used to manufacture medical devices.
Responding to criticisms that maintaining Section 301 tariffs on medical goods is inappropriate while the country and the world are fighting the COVID-19 pandemic, the U.S. Trade Representative (USTR) has now taken two steps to roll back the tariffs for medical supplies:
- Granting special exclusions on certain medical supplies, effective immediately and retroactively; and
- Announcing an emergency set of procedures for seeking further exclusions from Section 301 tariffs on Chinese-origin medicines, medical supplies, and parts and components used to manufacture medical items in the United States.
These exclusions and the new exclusions process provide meaningful tariff savings of up to 25 percent on covered products. The following points, discussed in detail below, are key:
- You need to review the exclusions granted to date, and monitor for new exclusions, as Customs & Border Protection (CBP) will not provide refunds unless you request them.
- The exclusions are retroactive and cover all previously collected Section 301 tariffs. But even though refunds are available for covered products at CBP, prompt action is also required to seek these refunds, as the right to request refunds will expire.
- There is a concrete deadline of June 25, 2020, to seek further exclusions.
- Because the USTR will issue exclusions on a rolling basis, getting exclusion requests in early can result in earlier duty savings, better cash flow, and an enhanced ability to seek refunds for duties that otherwise could become stale due to customs liquidation rules.
- Foley attorneys in the International Trade & National Security Practice can help you assess claims and prepare and file exclusion requests, as well as provide other help in dealing with Section 301 duties and other international trade issues.
Full details are provided below.
New Exclusions Provide Immediate Relief on Key Chinese-Origin Medical Supplies
Prior to the outbreak of COVID-19, the U.S. government had already granted exclusions on a limited set of medical supplies, including Harmonized Tariff System (HTS) exclusions for ventilators and oxygen masks and product-specific exclusions for products such as MRI devices, PET/CT scanners, and certain air purification equipment. Many Chinese-origin medicines and medical supplies, however, as well as most goods used in the manufacture of medical devices, were still subject to Section 301 duties or were awaiting USTR action on existing List 3 exclusion requests. Because the tariffs are paid by the importer of record – generally, the U.S. company – the tariffs increased the cost of manufacturing medical devices in the United States and, at times, limited the availability of Chinese-origin medicines, medical devices, and key parts and components.
The USTR has now taken steps to curtail these impacts, granting exclusions on such basic medical supplies as protective and surgical gloves, soaps, laboratory equipment, sanitary articles (such as face masks), surgical drapes, nonwoven hospital apparel, and other medical supplies. The specific exclusions granted to date can be found in the following Federal Register Notices:
- Fed. Reg. Vol. 87, No. 45 (March 10, 2020);
- Fed. Reg. Vol. 85, No. 51 (March 16, 2020); and
- Fed. Reg. Vol. 85, No. 52 (March 17, 2020).
Any company in the medical supply, medical device, health care, pharmaceutical, or related sectors – or that manufactures goods for these sectors – should review these notices to determine if they have imported or will be importing any products now excluded from the Section 301 tariff regime. Notably, these medical exclusions are retroactive to the imposition of the tariffs (with the starting date varying based upon the applicable list at issue). As discussed below, this opens up the possibility of seeking refunds of these Section 301 duties back to the original imposition of the duties, allowing for potentially a full refund of Section 301 duties paid to date.
The USTR likely will continue to grant numerous medical exclusions. These may occur either as part of the new exclusion process described below or as the USTR considers further unilateral exclusions on an HTS-wide or product-specific basis, much like occurred in the three highlighted Federal Register notices. The status of any particular HTS tariff line can be found on the USTR Section 301 website. Further, it is likely that the USTR will update the general Section 301 web page to gather together all COVID-19-related exclusions, found here. Companies in the impacted sectors should regularly monitor the USTR website for potential future exclusion developments.
New Medical Exclusions Process Promises Future Relief for Medical Supplies
If your company has any connection to manufacturing, importing, distributing, or consuming medicines or medical supplies from China, or is buying parts and components from China used to make such products, then the new product exclusions process should be of intense interest. USTR has now announced special procedures to allow companies that import Chinese-origin goods that are useful in fighting or treating COVID-19 to apply for a new exclusion. According to the USTR, it “has opened a new docket for members of the public, business, and government agencies to submit comments” on possibly removing duties from additional medical care products of Chinese origin. These new exclusions are intended to “supplement” the current Lists 3 and 4 exclusion processes, not to replace them.
All comments are due by June 25, 2020. Comments will be evaluated on a rolling basis, making it important to file early to avoid a likely rush of requests.
The process of applying for an exclusion will be familiar to any company that has applied for previous product exclusions, with the process being adapted to focus on COVID-19 concerns. In its Federal Register notice, the USTR lists the following requirements for filing for a medical exclusion:
- The requested exclusion must concern a product “needed to respond to the COVID-19 outbreak.” The scope of this requirement is not clear. For example, it may be possible that a particular product, while not used directly for fighting COVID-19, may help free up critical hospital resources in other areas, allowing hospitals to indirectly help COVID-19 patients. It is not known whether the USTR will entertain requests along these lines. Nonetheless, given the high tariffs being imposed, it may make sense to seek such exclusions where there is a plausible benefit that would materially aid hospitals stretched for resources.
- The comment can concern any product “subject to a pending or denied exclusion request.” Thus, any prior exclusion requests can be refocused on COVID-19 concerns and resubmitted. Even if a prior exclusion request is in the process of being reviewed by the USTR, it should be submitted again as a medical exclusions request, given that such filings likely will have a greater chance of success.
- The comment “specifically must identify the particular product of concern and explain precisely how the product relates to the response to the COVID-19 outbreak,” such as by explaining “whether a product is directly used to treat COVID-19 or to limit the outbreak, and/or whether the product is used in the production of needed medical-care products.” Based on prior experience with Section 301 product exclusions, precise identification of the product, and how customs can accurately identify products that do and do not fall within the exclusion, can be critical in getting a product exclusion through.
- Each submission must include the ten-digit subheading of the HTSUS applicable to the product.
- The comment should “define the product of concern as precisely as possible.” As illustrated by the three Federal Register notices that already have granted special medical exclusions, while in some cases it may be appropriate to have an HTS-wide exclusion, in most cases it is going to be important to exactly identify products within the ten-digit HTS level that are the subject of the exclusion request. Although the Federal Register notice suggests identifying the particular product “in terms of its functionality and physical characteristics,” it is best to provide as many identifying details as possible, to illustrate that the exclusion request is narrowly tailored to aid the COVID-19 fight.
- All applications must be in English.
- All applications must be submitted using regulations.gov, using docket number USTR-2020-0014.
- All exclusions must use file names that reflect the name of the person or entity submitting the comments.
- The comments should not include a cover letter.
- The comments may include attachments, exhibits, or annexes, but these should be submitted “in the same file as the comment itself,” rather than as separate files.
Responses to comments also can be filed on regulations.gov. These comments are due within three business days of the initial filing.
Call to Action for Medical Suppliers
Although the benefits of the medical exclusions process and the already-granted exclusions are potentially great, nothing will happen unless companies that import medical supplies and related products from China take prompt action. The items you should implement include the following:
Determine Scope of Medical-Related Supplies
A critical opening step is to determine whether your imports have known or potential medical uses or could be used as a part or component of a medicine or medical device. This review should proceed more broadly than the currently identified HTS exclusions, as there will likely be a flood of new exclusions based upon the new medical supplies exclusion process. Thus, it is important to establish a baseline of all potential products that can plausibly claim a connection to the COVID-19 fight.
Determine Scope of Imports
Your company should work closely with your customs broker(s) to get a list of all HTS numbers imported over the last three years where your firm acted as the importer of record. This is information that customs brokers are required by regulation to keep on hand, and it should be readily available. Broken down by HTS numbers, this data can identify not only the universe of import classifications, but also help group them by value, allowing your company to focus on the products where a medical exclusion would have the biggest revenue impact.
Review All Newly Granted Exclusions
Although it is only a start, the new exclusions listed in the Federal Register links provided above are now definitively excluded. Note that for Section 301 tariffs, the product or component receives the tariff exclusion, not the company. Thus, even if your company did not request an exclusion, it can still seek a refund, and benefit from the exclusion on an ongoing basis, provided the product meets the physical requirements of the exclusion.
Run All Key Products Through the USTR Website
There also are previously granted exclusions made as part of the Lists 1, 2, and 3 exclusions processes that qualify as medical supplies or may be a part or component to same. To pick up these additional excluded items, once your firm has identified all HTS numbers where your firm acted as the importer of record, you should run them through the USTR website to determine the status, including by checking them at the eight-digit HTS level and by checking the USTR list of granted exclusions. It is important to check both because many exclusions are of specific products within an HTS code, and thus may not show up on an HTS-only search.
Set Up Monitoring Protocols
It is expected that there will be a flood of medical exclusion requests, and that the numbers granted will be large, due to the wide variety of medical supplies used by doctors and hospitals. It is important to keep up with these new exclusions as the USTR announces them. Organizations in the medical, medical device, pharmaceutical, health care, and related fields should assign someone to daily check for new exclusions so that duty-saving opportunities are promptly identified.
Seek Refunds Where Appropriate
All exclusions granted to date have been retroactive, and this is likely to continue for new medical exclusions. Your company should look to determine whether there have been prior imports of goods where it has paid duties on excluded products. This could allow for refunds of the tariffs paid. Your customs broker should be able to handle refund requests, using the standard CBP protocols for seeking such refund requests.1
Monitor Refunds and Imports
Because of the strict limits on when importers of record can seek refunds, it is generally necessary to put in place strict tracking of imports that potentially can receive refunds, so that any medical exclusions granted in the future can be applied to any prior imports. This may require that importers of record take steps to prevent liquidation from occurring, which can bar or make it difficult to receive refunds due.
File for Exclusions
As developed above, there is a broad-based ability to apply for medical exclusions. Unlike prior rounds, where exclusions were difficult to come by, it is likely the USTR will much more liberally grant medical exclusions, given the ongoing pandemic and criticisms that the Section 301 tariffs have hampered the ability to source needed medicines, medical devices, and parts and components from China. Impacted companies should take steps to submit these exclusions quickly, to avoid the expected rush of requests.
Monitor Exclusion Requests for Rebuttal or Supporting Comments
The medical supplies exclusion process allows for the submission of rebuttal or supporting comments. These are on a tight deadline – only three business days – reflecting the urgency of the new exclusions process. Impacted companies should closely – and daily – monitor filings to determine if they should be commenting on or rebutting submissions as they occur.
Monitor Competitor Filings and Product Categories
Prior List 1-3 exclusion requests often were the subject of overlapping exclusion requests. In some cases, the USTR would pick one particular exclusion request and grant an exclusion based solely upon this one request, while not explicitly acting on the others. Because granted requests are based upon products rather than submitting entities, the process overall works well. This means, however, that submitting companies should monitor analogous requests for products of concern, as well as all submissions made by key competitors, and should not assume that any action taken will specifically reference a particular request.
Don’t Forget Section 301 Coping Mechanisms
Finally, companies should not assume that the medical supply exclusions request is the only way to cope with high Section 301 tariffs. There are a variety of other mechanisms to cope with these special duties, including the use of duty drawback, appropriate use of the first sale rule, foreign trade zones, evaluating whether the correct HTS number is being used, and various tariff-engineering strategies. If you are interested in finding out additional information on strategies for coping with the ongoing international trade war, including Section 301 and 232 special duties, please contact the authors.
How Foley Can Help
You may submit medical exclusion comments at any time, but must do so no later than June 25, 2020. Based on prior USTR exclusion processes, the cutoff is likely to be strict. It is also likely that USTR will be overwhelmed with submissions, so acting quickly may avoid major delays in reviewing the expected large volume of submissions. In addition, quick action could lock in earlier tariff savings, since the USTR will grant exclusions on a rolling basis.
Foley attorneys have submitted numerous exclusion requests, and have also helped numerous companies re-engineer their supply chains to lower the incidence of Section 301 tariffs. Coming up with narrowly crafted exclusion language that is administrable by customs has been an issue in prior exclusions, for example, leading to denials that could have been avoided with closer thought given to how the exclusion is presented. Taking care to tie the use of the product to COVID-19 concerns also is going to be important, as USTR is going to be vigilant in ensuring that the medical exclusions process does not become a vehicle for widespread exclusions that could undermine the use of Section 301 to address concerns about Chinese trade practices.
If you would like a consultation on whether a product or component is a viable candidate for the COVID-19 exclusion process, or help with preparing a medical supply exclusion request, please contact the authors pictured below.
In addition, other members of Foley’s International Trade & National Security Practice also have extensive experience with Section 301 tariffs and can assist you with your Section 301 issues, including:
- Christopher Swift, Partner, Government Enforcement Defense & Investigations Practice: [email protected] or 202.295.4103.
- Marynell DeVaughn, Of Counsel, Government Enforcement Defense & Investigations Practice: [email protected] or 202.295.4125.
Foley’s International Trade White Paper provides more advice on coping with all aspects of the international trade war, including various practical tips on coping with Section 232 and 301 duties. To request a copy, contact the authors pictured below.
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1 Although this particular notice pertains to List 1, similar advice pertains to other exclusions. The USTR has now posted links to the CMS advice for each of the four Lists (see List 1, List 2, List 3, and List 4.) and likely will do the same for the medical exclusions.