The USTR Tariff Exclusion Process: Five Things to Know About These Opaque Handouts

President Donald Trump's tariff war with China has been under way for about 18 months. As lead warrior, the Office of the United States Trade Representative (USTR) has announced, threatened, or rescinded several rounds of tariffs on nearly all Chinese imports, culminating in the "phase one" deal announced on December 13, 2019, lowering tariffs on some goods and canceling planned imposition of others.

Less well known, not all of the announced tariffs have taken place. Beneath the headlines, the USTR was busy processing requests filed by companies to exclude certain Chinese products from prior punitive tariffs. As of November 30, the USTR granted about 35 percent of exclusion requests and denied the remaining 65 percent, raising concerns over whether the Trump administration's tough talk was getting riddled with loopholes for favored special interests. Though the USTR outlines three criteria for it to make determinations on a specific case, the exemption process is opaque and conceivably could be influenced by political favoritism. Decisions to grant or deny exemptions are not explained, yet outcomes give real money to the lucky applicants and take real money from the unlucky.

So far, the USTR has handed about $3.2 billion in exemption tickets to favored importers for the $34 billion and $16 billion tariff lists. As exemptions are awarded for the next $200 billion list, past arithmetic suggests that the USTR may hand out another $12.8 billion to the lucky few.¹ At a minimum, this opaque off-budget process cries out for transparency—full explanations of decisions to grant or deny exemptions. Even better, a meaningful appeals mechanism should be created to review denial decisions.

Background on the Tariff Exclusion Procedure

Companies that file requests to exclude products from punitive tariffs identify the relevant 10-digit subheading of the Harmonized Tariff Schedule of the United States (HTSUS). The company must submit a request for each product it is seeking to exclude, even when products fall under a single 10-digit HTSUS subheading. Other companies can also submit requests for the same product.

When an exemption for a product is granted, all firms importing the same product from China are exempted from punitive tariffs, and the exemption applies retroactively to the date the tariff was imposed and lasts for one year, with the possibility of renewal. The USTR claims it decides on exemption requests based on three criteria: whether the product is available only from China; whether the tariff would severely harm the requesting firm or other US interests; and whether the product is strategically important to the "Made in China 2025" program or other Chinese plans.

Exclusion determinations, however, neither identify whether or which of these criteria applied to the request nor reveal whether political influence played a role.

Here are five things worth knowing about the USTR's tariff exclusion process, based on the USTR's experience with the $34 billion and $16 billion tariff lists.

1. Exclusion Requests Are Processed Very Slowly by an Overloaded USTR

The exclusion process for the $34 billion tariff list started shortly after duties took effect on July 6, 2018. The deadline to submit requests was October 9, 2018. Starting December 28, 2018, the USTR periodically published eight batches of determinations, with the last batch on October 2, 2019, almost a year after they were received.² In all, the agency took about nine months to wrap up the cases. The exemptions granted apply as of July 6, 2018, the effective date of the $34 billion tariff action, and extend for one year after Federal Register publication of each batch of USTR determinations. Accordingly, the exemption of products in the first batch will soon expire on December 28, 2019. On November 1, 2019, the USTR started the exclusion extension process for this initial set of exclusions granted in December 2018. Extensions could be granted for up to 12 months. The USTR will evaluate each extension on a case-by-case basis.

Given the heavy workload entailed by the $34 billion list, the USTR did not begin publishing exclusion determinations for the $16 billion list until July 31, 2019, almost a year after duties entered into effect on August 23, 2018. Exclusions for the $16 billion list were completed on October 2, 2019.

The USTR is now facing a more daunting mission: reviewing a total of 30,297 requests filed for the $200 billion list. The agency estimates that each product-exclusion request takes 2.5 hours to evaluate. As of November 30, 2019, the USTR had published five batches of determinations, with many more to come. Experience with the $34 billion tariff list, which entailed 10,814 exclusion requests, suggests that 13.5 personnel years were required to process all the requests. That is a significant demand on an agency with only 200 employees. The USTR may require three times as much personnel time to review the 30,287 pending requests for the $200 billion list. All the exclusion requests might not be decided before the end of 2020.

2. USTR Granted Exclusions to about 35 Percent of Total Requests and Denied the Remaining 65 Percent

For the $34 billion exclusion process, the USTR received a total of 10,814 requests. It granted exemption to 3,656 requests (33.8 percent) and denied 7,158 requests (66.2 percent). For the $16 billion list, the USTR received 2,869 requests, granted exemptions to 1,074 (37.4 percent), and denied 1,795 requests (62.6 percent).

The USTR publishes exemption results on products at the HS 10-digit level. Three mutually exclusive cases exist for each HS10 tariff line:

• "Consistent grant": All requests filed under these HS10 lines are approved.
• "Consistent deny": All requests filed under these HS10 lines are denied.
• "Inconsistent decision": Some requests filed under these HS10 lines are approved, while others are denied.

For the $34 billion exclusion process, the number of HS10 lines in the categories of consistent grant, consistent deny, and inconsistent decision were 94, 445, and 267, respectively. Corresponding numbers for the $16 billion list were 25, 110, and 73, respectively.

Based on the USTR's first criterion, we would expect HS10 lines with a "consistent grant" experience to be most dependent on imports from China, implying that US importers could not easily get substitutes from other countries. For the $34 billion exclusion process, the simple averages of imports from China as a share of total US imports for the consistent grant, consistent deny, and inconsistent decision HS10 lines were 19, 25, and 21 percent, respectively. Corresponding shares for the $16 billion list were 22, 25, and 29 percent. In both cases, the share of imports from China was lowest for the "consistent grant" category. Therefore, contrary to expectations, products that are frequently granted exemptions are not heavily dependent on imports from China. This cannot be reconciled with the USTR's first criterion for granting exemptions.

3. USTR Has Handed About $3.2 Billion in Exemption Tickets to Favored Importers

Of roughly $50 billion worth of products subject to tariffs in the first two lists, exemptions were granted to products worth about $12.8 billion. At the 25 percent tariff rate, the exemption tickets were worth $3.2 billion.

To estimate the value of exempted products, for each HS10 line, we assign an exemption rate to indicate the share of products under the HS10 line that receives exemption. We assume the exemption rate for each "consistent grant" HS10 line to be 100 percent. This assumption could overestimate the value of products that receive an exemption.

We assume the exemption rate for each HS10 line of "consistent deny" to be 0 percent. This assumption does not affect the estimated value of exempted products.

We assume the exemption rate for each HS10 "inconsistent decision" line to be the share of approved requests divided by the total number of requests received. Due to insufficient information, it is difficult to say whether this calculation leads to an underestimate or overestimate of exempted value.

We multiply each HS10 line's import value from China by its assumed exemption rate, and then sum over all HS10 lines, to estimate the total import value of excluded products. Based on 2017 US imports from China reported by the US International Trade Commission (USITC), the values of exempted products under the $34 billion and $16 billion lists were $8.3 billion and $4.5 billion, respectively.³ Total exemptions, some $12.8 billion, are about a quarter of imports subject to punitive tariffs in those two lists. Therefore, at the 25 percent tariff rate, US importers got tariff relief of about $3.2 billion, directly or indirectly. This is a substantial off-budget concession to lucky firms.

4. Exempted Imports Are Predominantly Machinery Products

Exemptions under the $34 billion list were mostly granted to machinery, mechanical appliances, and electrical equipment (HS 84-85) and various instruments (HS 90-92). Not surprisingly these are also products hit hardest by punitive tariffs. Exemptions under the $16 billion tariff list focused on machinery, mechanical appliances, and electrical equipment (HS 84-85) and plastics and rubber goods (HS39-40). Correspondingly, these are sectors most affected by the punitive tariffs. It is interesting to note that requests for transportation—vehicles, aircraft, and vessels (HS 86-89) recorded high "consistent deny" rates, above 50 percent, in both exclusion procedures.

5. Companies Filing for Most Exclusion Requests Are So Far Not Multinational Corporations

Among companies that filed more than 50 exclusion requests in the first two tariff lists, there were very few multinational corporations (MNCs), possibly because MNCs can adjust their supply chains for intermediate goods more easily than smaller companies. However, since the next tariff installments cover more consumer goods, where MNCs are prominent purveyors, they may submit more requests in subsequent rounds. For example, Apple, while not submitting any requests in the first two rounds, submitted 15 exclusion requests in the $200 billion tariff round. Home Depot and Microsoft also filed requests in the $200 billion round.

Conclusion

Trump's successive tariffs on imports from China impose a heavy burden on US firms and households. Despite administration claims to the contrary, strong econometric evidence shows that US buyers, not Chinese sellers, pay the added cost of tariffs. Moreover, by undermining confidence, Trump's tariffs curtailed business investment in 2018 and 2019. The successful conclusion of "phase one" negotiations, on December 13, 2019, was accordingly greeted with rising share prices and a more optimistic growth outlook for 2020.

Behind the headlines, however, a murky exemption process favors some US firms and disfavors others. Congress should not tolerate the opaque handout of billions of dollars in exemption tickets without public justification. At a minimum, the exemption process cries out for full explanations of grants and denials. Even better, an appeals mechanism should be created to review denial decisions.

* Zhiyao (Lucy) Lu was a research analyst at PIIE from March 2016 to February 2019. Views expressed here are solely her own and do not represent those of her employer.

Notes

1. Calculated as 3.2/50*200 = $12.8 billion.

2. The USTR published exclusion results on December 28, 2018; March 25, 2019; April 18, 2019; May 14, 2019; June 4, 2019; July 9, 2019; September 20, 2019; and October 2, 2019.

3. Underlying data and calculations are available here. Some HS10 codes for which companies filed for exclusions have no recorded US importing values in 2017 in the USITC DataWeb. When a company files a request, it is required to provide the quantity and value of this Chinese-origin product that the requestor(company) purchased in each of the last three years. Therefore, import values for such HS10 codes cannot be 0.  However, since we cannot determine the amount, 2017 US import values of these HS10 codes are assumed to be 0. The $34 billion and $16 billion exclusions had 44 and 15 such HS10 codes, respectively.