Tariffs have always been an important consideration when doing business with overseas companies or subsidiaries. But the newly implemented and proposed 25% and 10% tariffs on Chinese imports have magnified the importance of this issue, particularly for small and medium-sized enterprises.
From one perspective, analyzing the applicability of tariffs appears deceptively easy—pull up the Harmonized Tariff Schedule (HTS) codes and see if they apply to your prospective imports. It’s a black and white analysis.
Or is it? Tariff classification can often be a complicated exercise, especially for goods that may undergo further processing or transformation in the U.S. Combine that with opportunities for public comments on the still-proposed tariffs, and a separation tariff exemption application process, and there may still be ways to avoid harm to your bottom line.
First, here is a brief review of the proposed U.S. and Chinese tariffs.
Last month the United States Trade Representative (USTR) announced its intent to impose additional 25% tariffs on approximately $50 billion worth of Chinese imports. The new tariffs tend to focus on products from sectors that benefit from the “Made in China 2025” industrial policy, including aerospace, information and communications technology, robotics, industrial machinery, new materials and automobiles.
The first set contains 818 product lines, covering approximately $34 billion worth of Chinese imports. Those tariffs went into effect for products entering the U.S. on or after July 6, 2018. The second set, which contains another 284 product lines worth $16 billion, is currently under further review in a public notice and comment process.
Moreover, the USTR has now announced a much longer list of products potentially subject to a future additional 10% tariff (many of which are consumer products,) amounting to up to $200 billion in annual imports. The implementation date for the second and third lists have not yet been set.
Of course, what fun would a trade war be without skirmishes back and forth? On June 16, the China State Council Tariff Commission, the agency in China responsible for setting tariff rates, published an Announcement containing two lists of U.S. products on which an additional 25% tariff will be imposed. This included many quintessentially “American” products, such as soybeans, tobacco, orange juice, whiskey, and vehicles, in addition to some chemical products, medical equipment and other agricultural products.
The first list contains 545 product categories worth approximately $34 billion. The additional tariffs were imposed as of July 6, 2018. The second list, which contains another 114 product categories worth $16 billion, does not yet have a fixed implementation date. These tariffs are in addition to other Chinese tariffs implemented in early April in response to U.S. global steel and aluminum tariffs. To date, China has not announced its own potential response to the new USTR list of $200 billion in products subject to a 10% additional tariff—but rest assured that will come.
Do I just have to eat the cost or pass it on to my customers?
1. Check your Customs Classification
So what is an importer of record to do? The first step is to confirm whether you are actually using the proper HTS classification for your existing imports. This applies to both imports to the U.S. and to China. Particularly when an item has previously been tariff-free or subject to a low tariff, importers may not have carefully assessed the applicable HTS code, and a surprising quantity of imports are improperly self-classified. Now that a slightly different HTS sub-class may increase the cost of an item by up to 25%, an audit of all your company’s imports is highly recommended.
Of course, if this leads to a discovery of erroneous past HTS codes, importers should be very cautious about simply using a different HTS code after July 6. How will that look to the overworked Customs and Border Protection (CBP) official responsible for screening imports? Unless it is an air-tight case of prior misclassification, this could lead to additional tariffs and penalties if CBP ultimately does not agree with your HTS analysis. Therefore, obtaining a prospective binding ruling from CBP may be advisable; we recommend consult with an international trade attorney regarding the binding ruling application process.
2. Participate in the Public Comment Process
Another important step, as to products on the second and third tariff lists, is to participate in the public comment period. Written comments can be submitted to comment on the impact such tariffs will have on your business, with a July 23 deadline for the second list and August 17 deadline for the third list. Do not be overly cynical of public comment procedures—the first list of tariffs was reduced from 1,333 products (on the first draft list) to just 818 products on the final rule, and at least some of those changes can be attributed to the thousands of comments submitted during that list’s public comment period.
Unfortunately, no such formal public comment process exists for the proposed China tariffs on U.S. goods.
3. Apply for an Exclusion
What if you confirm that your imports are subject to the additional 25% or 10% tariffs? U.S. stakeholders may request that particular products within the first set of 818 product lines be exempt from the additional duties (an identical or similar process will likely be implemented as additional tariffs go into effect). However, interested companies and trade associations should move fast, because all requests must be submitted by Oct. 9, 2018.
According to the notice published by the USTR on July 11, a granted exclusion will apply retroactively to the July 6 date of imposition of the additional duties and extend for one year after the publication of such exclusion determination.
At minimum, an exclusion application must include the following information:
- Product information - including a product description, the most applicable HTS subheading and annual quantity and value of the Chinese-origin product purchased by the requestor in the last three years;
- Rationale for the exclusion - including, most importantly, whether the product is only available in China, whether the additional duties will cause “severe economic harm” to the requestor or other U.S. interest, and whether the product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
All exclusion requests will be published online and interested parties may submit responses, either in support or opposition. Based on the precedent of the steel and aluminum tariffs exclusion process, it appears that some domestic suppliers are actively monitoring and objecting to exclusion requests by arguing they either already produce, or have the ability to produce, similar products.
While USTR has set time periods for companies to submit responses and reply to responses, no review period limit has been imposed on the USTR. Thus, it’s not clear yet how quickly the USTR will issue rulings on exclusion requests, which is probably a huge relief for the officials tasked with reviewing all of these applications.
Can I Do the Same Thing for Exports to China?
According to the announcement from the China State Council Tariff Commission, the additional “trade war” tariffs will not include any special exemption application process. However, based on prior Chinese customs procedures, if any such exemption process is eventually instituted, it likely will require the application to come from a Chinese entity (i.e. not the U.S. supplier). Combined with the lack of a public comment process, it is much more difficult for a U.S. company to influence or seek exemptions from the Chinese tariffs.
For now, exporters to China should confirm current export procedures and customs classifications. Some U.S. exporters are already reporting some less formal trade disturbances, such as increased border inspections and products being held in quarantine. Companies with Chinese subsidiaries should also review general compliance matters, such as confirming maintenance of valid operating licenses, employee contracts and visas for foreign employees.
Taft summer associate Ying Zhu co-authored this article with Taft attorney Russell Menyhart.