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Tariff Increases Prompting More Companies to Shift Sourcing Out of China

Friday, November 30, 2018
Sandler, Travis & Rosenberg Trade Report

One of the ways companies affected by this year’s tariff increases on imports from China can avoid or reduce those duties is by moving production, in whole or in part, to other countries. A number of recent press accounts indicate that use of this option is accelerating, largely to the benefit of smaller economies in Asia.

Some production has been moving out of China for years as government officials work to refocus the country’s economy on services and high-tech manufacturing. However, a Reuters article states, “the risk of more, and higher, US tariffs on China, and fears that nearby emerging economies can only accommodate new businesses on a ‘first come, first served’ basis,” are driving what industry experts say is “the biggest shift in cross-border supply chains since China joined the World Trade Organization in 2001.” A Politico article adds that about 84 percent of companies responding to a recent Ernst and Young survey said they are reviewing their supply chains amid the ongoing trade tensions and 51 percent have already made changes.

Press reports state that as a result countries in Southeast Asia are seeing increased interest from businesses looking to relocate manufacturing operations. For example, the Politico article states, “small and medium-sized factories that make furniture, textiles and electronics in China’s Pearl River Delta and Yangtze River Delta regions, the country’s main export production hubs,” are being lured to industrial parks in Vietnam. A CNBC article adds that Vietnam and Malaysia could take on more low-end manufacturing of technology products and that auto parts production could be shifted to Thailand and Malaysia. Even makers of large industrial machinery are considering moving some of their assembly lines to Japan or Mexico, CNN states.

At the same time, countries in the region do not typically have manufacturing technology, infrastructure, skilled labor, or customs procedures comparable to those of China, making it difficult to shift sourcing totally away from that country. As a result, Reuters quoted Sandler, Travis & Rosenberg’s Sally Peng as saying, “everyone is looking for that China Plus One, Plus Two, Plus Three country strategy, all the way to Africa.”

Changing the country of origin of imported goods is a legal and proven method of mitigating liability for import duties, including the Section 232 and 301 duties the U.S. has imposed this year on hundreds of billions of dollars’ worth of goods from China and other countries. For instance, U.S. Customs and Border Protection has found that the assembly of numerous parts to create various modules, and the assembly of these modules to produce aircraft engines, result in a substantial transformation of the parts so that their country of origin is the country where the engine is produced. This approach can be particularly useful for certain U.S. or other products that fall within the special HTSUS Chapter 98 provisions, many of which are wholly or partially exempt from the additional tariffs.

Click here to learn more about these and other duty mitigating strategies.

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