Fitbit will shift production to "outside China" starting in January for “effectively all of its trackers and smartwatches” to escape exposure to the tariffs on Chinese goods, said the company Wednesday. "Those products will no longer be of Chinese origin and therefore not subject to Section 301 tariffs,” said Fitbit, without disclosing where it's moving its sourcing. Smartwatches and fitness trackers, comprising the entire Fitbit product line, were hit with 15 percent List 4A tariffs Sept. 1 as part of the broad category of 8517.62.00.90 goods that also includes smart speakers and Bluetooth headphones (see 1908130028). The company began exploring potential alternatives to China last year, said Chief Financial Officer Ron Kisling. It altered its supply chain and manufacturing operations with “additional changes underway,” the company said. Fitbit said it will give additional details, including the financial implications, on its Q3 call within the month. Fitbit devices are assembled in China from parts and components sourced from Taiwan and Singapore, but shifting final assembly outside China “has been a very big challenge for us,” testified Executive Vice President-General Counsel Andy Missan at a Section 301 hearing in June. The devices require “high-precision assembly and high volume,” he said then. "We have not been able to find those characteristics in other locations,” despite looking throughout Southeast Asia, he said.
Section 301 Tariffs
Section 301 Tariffs are levied under the Trade Act of 1974 which grants the Office of the United States Trade Representative (USTR) authority to investigate and take action to protect U.S. rights from trade agreements and respond to foreign trade practices. Section 301 of the Trade Act of 1974 provides statutory means allowing the United States to impose sanctions on foreign countries violating U.S. trade agreements or engaging in acts that are “unjustifiable” or “unreasonable” and burdensome to U.S. commerce. Prior to 1995, the U.S. frequently used Section 301 to eliminate trade barriers and pressure other countries to open markets to U.S. goods.
The founding of the World Trade Organization in 1995 created an enforceable dispute settlement mechanism, reducing U.S. use of Section 301. The Trump Administration began using Section 301 in 2018 to unilaterally enforce tariffs on countries and industries it deemed unfair to U.S. industries. The Trump Administration adopted the policy shift to close what it deemed a persistent "trade gap" between the U.S. and foreign governments that it said disadvantaged U.S. firms. Additionally, it pointed to alleged weaknesses in the WTO trade dispute settlement process to justify many of its tariff actions—particularly against China. The administration also cited failures in previous trade agreements to enhance foreign market access for U.S. firms and workers.
The Trump Administration launched a Section 301 investigation into Chinese trade policies in August 2017. Following the investigation, President Trump ordered the USTR to take five tariff actions between 2018 and 2019. Almost three quarters of U.S. imports from China were subject to Section 301 tariffs, which ranged from 15% to 25%. The U.S. and China engaged in negotiations resulting in the “U.S.-China Phase One Trade Agreement”, signed in January 2020.
The Biden Administration took steps in 2021 to eliminate foreign policies subject to Section 301 investigations. The administration has extended and reinstated many of the tariffs enacted during the Trump administration but is conducting a review of all Section 301 actions against China.
Revenue declined 23 percent in Micron Technology’s fiscal 2019 ended Aug. 29, but senior executives on a fiscal Q4 call Thursday wouldn’t break out how much of the decrease was attributable to the disruption in shipments to Huawei. Revenue in Q4 was down 42 percent from a year earlier, but up 2 percent sequentially, exceeding Micron’s previous guidance on better-than-expected demand in the quarter, said the company. “In recent months, we have seen increased demand from customers headquartered in mainland China,” said CEO Sanjay Mehrotra. Some customers “could be making strategic decisions to build higher levels of inventory in the face of increased trade tensions between the U.S. and China,” he said. The components Micron sells have heavy exposure in the first three rounds of Section 301 tariffs on Chinese goods. President Donald Trump announced in August he would hike those tariffs in October (see 1908230006). Micron, “with continued mitigation,” was able to limit the tariffs’ impact on Q4's consolidated gross margin to fewer than 20 basis points, said Chief Financial Officer David Zinsner. Micron resumed shipping “some products” to Huawei in Q3 that were “not subject” to the Trump administration’s export restrictions, said Mehrotra. Sales to Huawei in Q4 declined sequentially and “were down meaningfully from the levels we anticipated” before the Commerce Department put Huawei on the entity list, he said. Micron applied to Commerce for licenses “that would allow us to ship additional products, but there have been no decisions on licenses to date,” he said. “If the entity list restrictions against Huawei continue and we are unable to get licenses, we could see a worsening decline in our sales to Huawei over the coming quarters.” The stock plunged 11 percent Friday to $43.21.
Rationales for opposing the President Donald Trump’s plan to increase Section 301 duties on Chinese goods to 30 percent “have only strengthened with the passage of time since the imposition of the original tariffs on Lists 1, 2, and 3,” commented CTA in docket USTR-2019-0015. Since July 2018, “these tariffs have cost the consumer technology industry and its consumers -- not China -- more than $10 billion,” it said. That includes more than $1 billion in tariff payments “on 5G-related products, it said. For Q4, the industry “expects to pay an additional $7 billion to account for tariffs on new products,” said CTA. Tariffs create “a negative chain reaction” for the consumer tech industry, commented the Information Technology Industry Council. The administration claimed it acted “to avoid placing tariffs on consumer products” when it imposed the first three rounds of 25 percent duties, but “there is simply no way to protect consumers from tariffs on $200 billion worth of goods,” said ITI. Hiking the duty rates to 30 percent “would only cause additional harm to U.S. consumers, cost U.S. jobs, and undermine U.S. technology companies in the fight for global leadership,” said ITI. “The proposed increase of tariffs on products from Lists 1-3 specifically affects” a wide variety of consumer products, including smart appliances and virtual-reality headsets, it said. Raising tariffs “will have broad implications, as all telecommunications equipment relies on gateways, modems, optical transceivers and routers,” it said.
Five of the top eight consumer tech product categories in terms of 2018 customs value temporarily escaped 10 percent List 4 Section 301 tariff exposure at least until Dec. 15 (see 1908130015), well after imports will have arrived for the peak holiday selling season, per Office of the U.S. Trade Representative documents released Tuesday. Bluetooth headphones, smartwatches, smart speakers and finished TVs from China face immediate 10 percent tariff exposure Sept. 1.
The Trump administration will delay to Dec. 15 the 10 percent List 3 Section 301 tariffs on smartphones, laptops, videogame consoles and computer monitors, announced the Office of the U.S. Trade Representative Tuesday morning. Delaying the tariffs on those articles appears certain to spare the consumer tech industry from passalong price increases during the peak holiday selling season. It bears watching whether the delay will prompt a rush on shipments of those items from China, as U.S. importers scramble to beat the higher duties. There was no immediate word on the fate of other products the tech industry targeted for List 4 removal, including TVs, smart speakers, smartwatches and Bluetooth headphones. Other products are being removed from List 4 entirely, “based on health, safety, national security and other factors,” said USTR. The full and final List 4 will appear on the USTR website Tuesday, it said. USTR will install a List 4 exclusion process for products with immediate tariff exposure, it said.
Even at only 10 percent, the List 4 Section 301 tariffs due to take effect Sept. 1 on up to $300 billion worth of Chinese imports (see 1908010059) “would have a much larger impact on the U.S. tech sector” than the previous three rounds of 25 percent duties, said an S&P Global Ratings report Monday. The List 4 tariffs would “significantly raise costs for manufacturers and prices for consumers,” much more than current tariffs, it said.
Geopolitical and macroeconomic factors slammed ON Semiconductor’s Q2 revenue, said Chief Financial Officer Bernard Gutmann on a Monday earnings call. A “sharper-than-expected” broad-based inventory correction, largely in the automotive market, drove revenue lower in the quarter, he said.
China vowed Friday to retaliate if the Trump administration carries out its threat to impose the 10 percent List 4 Section 301 tariffs on $300 billion in Chinese imports not previously dutied (see 1908010059). If the U.S. “imposes tariff measures and implements them” as threatened Sept. 1, “China will have to take necessary countermeasures to resolutely defend the core interests of the country and the fundamental interests of the people,” said a Commerce Ministry spokesperson. “All the consequences will be borne by the US.”
Questions abound about President Donald Trump’s decision Thursday to put 10 percent List 4 Section 301 tariffs into effect on Chinese imports Sept. 1. Since Trump can’t legally impose List 4 by tweets, all eyes will await the Office of the U.S. Trade Representative notice soon to be published in the Federal Register detailing which product categories, if any, are spared from the final duties.
President Donald Trump appeared to put the kibosh on Apple’s requests for List 3 Section 301 tariff exclusions on Chinese imports of graphics processing modules, power supplies, heat sinks and a dozen other types of components for the Mac Pro desktop due this fall. Tweeted Trump Friday: “Apple will not be given Tariff waiver, or relief, for Mac Pro parts that are made in China. Make them in the USA, no Tariffs!” There are “no other sources” outside China “for this proprietary, Apple-designed component,” said Apple in each of the 15 product exclusion requests it filed July 18, as searchable Thursday on the Office of the U.S. Trade Representative public docket. “This product is a component of a consumer electronic device,” said Apple. “It is not strategically important or related to ‘Made in China 2025' or other Chinese industrial programs.” Public responses in support or opposition to the exclusion requests are due Aug. 1, and Apple had few backers among those who weighed in with an opinion through Friday. “USTR should not set a harmful precedent of exempting companies from tariffs that move jobs to an overt adversary of the United States,” commented Gregory Lewandowski on Apple’s request for tariff exclusions on Mac Pro graphics processing modules. “This is absolute garbage,” commented Logan Marotz of I.E. Productions. “We cannot continue to bend to the will of these companies. They knew the possible consequences of their actions by moving their assembly factories over seas. Tough luck, but this is the game they play.” Apple reportedly is shifting Mac Pro assembly to a contract manufacturer near Shanghai; that it's seeking tariff exclusions on imported parts suggests it's still doing final assembly in Texas, as it did with previous generations of Mac Pro desktops. Apple didn’t comment Friday, nor did USTR on Trump's tweet. Trump also targeted French President Emmanuel Macron Friday and France's initiation of a digital service tax, on which USTR launched a Section 301 investigation July 10. "France just put a digital tax on our great American technology companies," tweeted Trump. "If anybody taxes them, it should be their home Country, the USA. We will announce a substantial reciprocal action on Macron’s foolishness shortly. I’ve always said American wine is better than French wine!"