Importing merchandise made in China is far more expensive than before the imposition of additional tariffs leaving many U.S. importers of products from China grappling with the additional duty. Beginning on July 6, 2018, and pursuant to Section 301 of the Trade Act of 1974, the United States imposed 25 percent additional tariffs in three tranches on $250 billion worth of Chinese merchandise imported into the country.
A fourth tranche was imposed on September 1, 2019 on approximately $116 billion worth of goods at 15% additional duty. Pursuant to the “Phase One” deal between the U.S. and China, the rate will be reduced to 7.5% on February 14, 2020. Talks with the Chinese continue, but President Trump and his administration continue to use tariffs as a negotiating tool. For companies importing into the United States, this tactic has created a significant financial burden and caused much uncertainty.
Companies importing components and finished products into the U.S. have been hit with increased tariffs on merchandise including: cranes, work trucks, motors, engines, pumps, mechanical appliances, machine tools, fabric, apparel, jewelry, and consumer products. If companies are not already doing so, now is the time to think long term about creating supply chain efficiencies and mitigating the increased duty burden.
The Section 301 tariffs on Chinese merchandise started as a response to China’s Intellectual property regulations and forced technology transfer requirements. The Trump administration has broadened its criticism of Chinese trade and economic policy to include Chinese duties on agricultural products, currency manipulation and cyber theft. U.S. – China negotiations continue, but the Trump administration has indicated that the remaining tariffs will stay in place – at least for the foreseeable future. Accordingly, manufacturers must learn to manage in a world with increased tariffs and should re-evaluate supply chains. There are several legal tools available to mitigate the increased duty liability.
Below is a list of possibilities for supply chain triage:
Implement duty savings with “first sale” – If you are part of a so-called three tier transaction (manufacturer– middleman – importer), you may wish to take advantage of the “first sale” rule. U.S. Customs and Border Protection (“Customs’) duties are normally assessed on the sale between the importer and the middleman vendor. A unique aspect of U.S. customs law, “first sale,” allows importing companies to lawfully reduce duties by entering goods at a lower value than the price paid to the foreign vendor. With “first sale,” duties are assessed on the transaction between the overseas manufacturer and the middleman vendor. The importer would then pay duties on the value of the components and labor, but not on the middleman vendor’s markup, thereby shrinking the transaction value of the goods and reducing duty payments. First sale can be used even if the vendor is related to the importer and/or the factory. While it has sometimes been difficult to obtain the needed information from business partners to take advantage of first sale, in the current environment, Chinese vendors have proven eager to work with U.S. companies to reduce their duty exposure.
The validity of first sale is well established and supported by numerous years of case law, which set out the requirements. Specifically, there must be two bona fide sales between importer, middleman and factory, the goods must be destined for export to the United States, and the foreign manufacturer/seller and the middle-man/buyer must either be unrelated or conduct their transactions at arm’s length. The Court of International Trade has established that when these criteria are met, Customs must base the dutiable value of the goods on the manufacturer’s price to the vendor. First sale has been used for many years in industries with high duty rates, such as textiles and apparel. With the advent of the Section 301 duties at 25 percent, effected industries are eager to explore the possibility of additional duty savings with first sale.
Take advantage of approved Section 301 approvals- If you have not filed your own request for exclusion from Section 301 duties with USTR, or if you have, and the request was denied, it still is possible to take advantage of exclusion requests granted to others. The U.S. Trade Representative has approved over 5000 exclusions for products on the Section 301 lists. If the product description matches, any importer can take advantage of the approval and file for refunds with U.S. Customs. Through two distinct administrative procedures, importers can recoup 18 months- worth of additional duty payments.
Review purchase order terms – Incoterms determine which party bears the responsibility for duty and other supply chain payments on import into the United States. Now is the time to add language to agreements to shift the duty burden wherever possible. Contract language should also be added to account for potential uncertainties regarding future tariffs.
Consider moving part or all of production outside of China so that the country of origin is a third country – Clearly, moving some or all of production is not simple or inexpensive, but could be cost effective in the long run. For example, if done properly, sourcing parts or components in China which are then moved to another country for further processing and assembly may allow a company to legally change the country of origin to some country other than China. To effectively change the country of origin of an imported product, the merchandise must be substantially transformed into a new article of commerce. This is a product-specific analysis and will depend on sourcing of the components and complexity of production steps outside of China.
Importantly, under the 2016 Court of International Trade decision, Energizer Battery Inc. v. United States, 190 F. Supp. 3d 1308 (Ct. Intl. Trade 2016), mere assembly of foreign component parts does not constitute substantial transformation. The Energizer decision noted that, “whether there has been a substantial transformation depends on whether there has been a change in the name or use of the components.” The court focused not on whether “the components as imported have the form and function of the final product” but rather “whether the components have a pre-determined end-use at the time of importation.” The court suggested that the imported parts would need to undergo “further work” beyond mere assembly to be considered substantially transformed.
Review classification of imported products – Now is a good opportunity to review compliance, ensure that products are classified in the correct Harmonized Tariff Schedule provision, and potentially moved to a provision with a lower duty rate. Customs is on the lookout for importers who are purposefully misclassifying merchandise, but a change in classification after the proper due diligence is an exercise of reasonable care and should be encouraged by U.S. Customs.
Determine whether non-dutiable components of price legally can be broken out to lower duty liability – Pursuant to 19 USC §1401, the dutiable value of imported merchandise is typically based on the transaction value of the goods entering the United States. When merchandise enters the U.S. duty free or with a low duty rate, many importers never pay attention to the additions to the costs imbedded in the price of the imported merchandise. With proper structuring of the sale and recordkeeping, many of the foreign fees that are elements of the price are valid deductions from the transaction value upon which duty payments are determined. For example, the use of actual rather than estimated charges, separate identification of charges on invoices and the timing of the charge, among other things, can affect whether the charge may be taken as a deduction in calculating dutiable value.
Whether the U.S. and China strike a Phase Two deal soon or not, it is anticipated that the Trump administration will continue to use trade tools such as the Section 301 tariffs on components and goods imported from China. Accordingly, now is the time for U.S. importers to triage supply chains and reduce increased duty liability.
Laura Siegel Rabinowitz works with domestic and multinational businesses on complex supply chain issues and other complicated challenges assassociated with trade, helping clients to ensure compliance and reduce their duty exposure.
Laura Siegel Rabinowitz | Shareholder | Greenberg Traurig, LLP MetLife Building | 200 Park Avenue | New York, NY 10166 Tel: 212.801.9201 | firstname.lastname@example.org
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