New Legislation Introduced in Congress Proposes Ending Normal Trade Relations with China and More

On November 14, 2024, Rep. John Moolenaar (R-Mich.), chair of the House Select Committee on the Chinese Communist Party, introduced the Restoring Trade Fairness Act, seeking to suspend China’s Permanent Normal Trade Relations (“PNTR”) status.

This follows the introduction of an identical bill in the Senate earlier this year by Senators Tom Cotton (R-AR), Marco Rubio (R-FL), and Josh Hawley (R-MO), the Neither Permanent Nor Normal Trade Relations Act, and renews the potential for China’s PNTR status to be revoked. If passed, this law would have far-reaching consequences for U.S. importers and manufacturers.

Here is a summary of the bill’s most significant implications if passed:

1. 1. Increased Tariffs: The new tariffs would generally align with the higher rates in column 2 of the HTS, from a minimum of 35% and up to 100% for specified articles enumerated in the bill. These tariff increases would be phased in over 5 years.
   2. Inflation Adjustments: The bill includes provisions for annual adjustments of specific and compound tariff rates to account for inflation, ensuring that the tariff rates remain effective over time.
   3. Valuation of Chinese Imports: The bill mandates that Chinese goods be appraised based on their U.S. value, with importers required to submit value statements for verification by U.S. Customs and Border Protection.
   4. Removal of the De Minimis Exception: The bill removes the duty exemption for low-value shipments (under $800) from China, which are currently admitted duty-free under the de minimis rule.
   5. Compensation for Retaliation: The bill establishes a trust fund to compensate U.S. producers for revenue losses due to Chinese retaliatory actions. Funds would be allocated to purchase unsold goods intended for export to China and support the U.S. defense sector.

History of China’s Permanent Normal Trade Status

Merchandise originating from a country with PNTR status is subject to the duty rates set forth in column 1 of the Harmonized Tariff Schedule of the United States (‘‘HTS’’). As a member state of the World Trade Organization (“WTO”), the United States is expected to extend Column 1 rates to all other WTO member states. On the other hand, countries without PNTR status are subject to HTS column 2 rates, which are significantly higher.

The United States granted China permanent PNTR status in 2001 with the U.S.-China Relations Act, shortly after China became a WTO member state. Thus, since 2001, Chinese goods were generally subject to Column 1 rates in light of China’s status as a WTO member state.

The Restoring Fairness Trade Act bill asserts that China has failed to comply with the open market-oriented principles endorsed by members of the WTO and that China’s distortive trade practices has caused harm to the United States. The bill further explains that because there is no mechanism at the WTO to remove a member government that has failed to comply with these principles, the United States may take unilateral action against China. The bill thus asserts that the United States has a basis for revoking China’s PNTR status.

Overview of the Restoring Fairness Trade Act Bill

Tariff Rate Increases

The proposed Restoring Trade Fairness Act would revoke China’s PNTR status, resulting in higher tariffs across the board on Chinese imports into the United States. These new tariffs would align with the higher rates in Column 2 of the HTS, subject to certain exceptions.

First, the bill proposes a minimum 35% ad valorem duty rate for all Chinese goods. Thus, any Column 2 rates below 35% would be adjusted to the minimum 35% rate allowed under the bill.

Second, the bill sets out a list of strategic articles which would be subject to a minimum duty rate of 100%. Generally, these include:

• • various minerals including silver, gold, and uranium;
  • certain vaccines and drugs;
  • ADP machines and parts and accessories thereof;
  • televisions, cameras, and parts thereof;
  • integrated circuits and circuit assemblies;
  • semiconductors;
  • solar cells and modules;
  • various aircraft (including unmanned aircraft), aircraft parts, and other advanced technologies;
  • parts and accessories for certain agricultural machines; and
  • certain defense-related articles.

The specific HTS subheadings goods that would be subject to a 100% duty rate are appended to the end of the bill.

The proposed duty rate increases on Chinese imports that would be phased in over the course of five years, as follows:

• • 10% duty increase 180 days after the passage of the bill
  • 25% duty increase 2 years after enactment
  • 50% duty increase 4 years after enactment
  • 100% duty increase 5 years after enactment

Importantly, these increases would be adjusted annually to account for inflation – which is unusual for tariff rate increases. Specifically, the bill proposes that if any duty rates for Chinese goods fall under the applicable minimum duty rate (i.e., 35% or 100%) after adjustment for inflation, a calculation of the specific or compound rate of duty would be added in order for the duty to meet the relevant minimum duty rate.

Finally, the President would be granted authority to further increase tariffs or impose quotas to reduce reliance on Chinese imports or penalize China for unfair trade practices. The President can also prohibit imports that pose a national security threat or are produced through unfair practices or human rights violations. The bill, however, does not give the President authority to reduce tariff rates.

Tariff-Rate Quotas

Under the bill, the President is required to establish a tariff-rate quota for all goods that are only imported from China. The President will determine which goods are only imported from China based on information received from the International Trade Commission and the Department of Commerce on a yearly basis. The relevant quota will be set at an amount equal to the consumption of that article in the United States in the most recent calendar year.

Any such goods that are entered within the tariff-rate quota will only need to pay a duty equal to the duty in place prior to the enactment of the bill (i.e., when China still had PNTR status). However, goods entered above the quota will be subject to a 100 percent duty rate. The bill also provides that any in-quota goods will be subject to a phased-in duty rate increase, ultimately reaching 100 percent 7 years after the date of enactment.

Valuation of Chinese-Origin Imports - Goodbye First Sale

The bill proposes to supersede typical valuation rules with respect to Chinese-origin goods. Instead of applying valuation principles as set out in the WTO Customs Valuation Agreement, Chinese-origin goods will be appraised on the basis of United States value.

The bill defines “United States value” as “the price at which the imported merchandise or similar imported merchandise is freely offered for sale, packed ready for delivery, in the principal market of the United States to all purchasers, at the time of importation of the imported merchandise.’’

Thus, upon entry an importer of Chinese goods will be required to submit the United States value of merchandise which will be verified by Customs and Border Protection. This will likely be a significant administrative burden on importers.

Removal of De Minimis Exemption for Chinese Goods

The bill removes the duty exemption for low-value shipments (under $800) from China, which are currently admitted duty-free under the de minimis rule. Thus, even small shipments will be subject to the new duty rates set out in the bill. This amendment would be in effect as of the bill’s date of enactment.

Compensation to U.S. Domestic Industry

Revenue collected from the duties would contribute to a trust fund to compensate producers affected by China’s potential restrictions on imports in response to the bill. The trust fund would also be used to buy goods in domestic sectors potentially affected by loss in revenue, such as the agricultural, semiconductor, mineral fuels, and aircraft sectors. Any remaining amounts will be transferred to the Department of Defense.

Such an arrangement has some precedent under U.S. law. The Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”), which was repealed in 2006, distributed duties assessed from an antidumping or countervailing duty order to affected domestic producers. While the CDSOA was relatively quickly repealed and subject to a number of WTO-disputes, eligible U.S. producers were able to receive significant compensation for harm from unfairly imported goods while the law was in effect.

Cooperation and Accountability at the WTO

Under the bill, the U.S. Trade Representative is directed to modify the U.S. Schedule of Concessions at the WTO to allow for the suspension of NTR status for WTO members without breaching duty concessions.

This is unlikely to be accepted by the WTO. Instead, there will likely be a number of actions filed at the WTO against the United States on the basis of the bill, if passed.

Potential Impacts

If passed, this bill will have significant impacts across industries in the United States. U.S. manufacturers that rely on Chinese imports for raw materials, components, or finished goods will face higher costs due to increased tariffs. This could lead to higher production costs and reduced profit margins. In anticipation of such changes, manufacturers may need to diversify their supply chains to reduce reliance on Chinese imports. This could involve finding alternative suppliers in other countries or increasing domestic production.

Further, Chinese retaliatory measures could impact U.S. manufacturers and farmers that export to China, leading to reduced market access and potential revenue losses. Such manufacturers or farmers may be able to apply for relief from the U.S. government in the form of payments from the trust established under this bill for affected domestic industries.

Likelihood of Passage

While there is growing sentiment on the hill for China-related trade legislation, there is likely to be significant opposition because of potential harms caused by this bill’s far-reaching implications as drafted. In addition, Democrats may be hesitant to support a bill that would give President Trump additional authority over trade. So far, no Democrats have joined the bill in either the House or the Senate. Unless this bill gets significant bipartisan support, it will not advance through the Senate. Nonetheless, the bill’s introduction could be indicative of growing momentum in Washington surrounding the removal of China’s PNTR status. Indeed, the bill’s introduction has been followed by the publication of a report by the U.S.-China Economic and Security Review Commission recommending to repeal China’s PNTR status, which may shore up additional enthusiasm.

Thus, companies importing or purchasing any Chinese-goods should monitor the situation, particularly once both the Senate and House have a Republican majority. Moreover, even if this bill is not passed in its entirety, parts of this bills may eventually find themselves into law – such as the removal of the de minimis exemption and changes in valuation rules for Chinese products.