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The Art of the Trade Deal 2.0 – Update on Top Strategies to Avoid or Reduce Section 232 and 301 Duty Increases

Wednesday, October 23, 2019
Sandler, Travis & Rosenberg Trade Report

by Lenny Feldman

[Editor’s note: This article has been updated since its original publication to reflect more recent developments.]

U.S. importers, exporters, and manufacturers are continuing to look for ways to mitigate the impact of the additional tariffs the U.S. has levied on hundreds of billions of dollars’ worth of imported goods, including steel and aluminum from most global sources and thousands of products from China, as well as the retaliatory tariffs U.S. trading partners are imposing on U.S. exports. Despite ongoing policy changes, there are a number of proven and legitimate ways to avoid or reduce these duties. This article provides an update on several strategies companies can use in structuring their own trade deals.

Exclusions. Both the Department of Commerce (for aluminum and steel) and the Office of the U.S. Trade Representative (for China goods) are accepting requests to exclude specific products from the tariffs. These processes offer companies or trade associations an opportunity to explain how and why such imported goods are critical to the U.S. economy and could not be sourced elsewhere. Many of the requests submitted to date have been approved when a convincing case is made. Companies should carefully review the exclusions granted thus far for China List 1, 2, and 3 products to determine if their own imports are covered. In addition, USTR recently announced plans to accept exclusion requests for China List 4A goods from Oct. 31 to Jan. 31.

Tariff Engineering. As much as U.S. Customs and Border Protection has resisted the idea in the past, the courts have continually affirmed that CBP can only levy tariffs on goods in their condition as imported. This has led importers in a variety of industries where high duties prevail to import products in unfinished or embellished forms to legally take advantage of classification provisions carrying a lower or free rate of duty. For instance, in some cases components imported separately would fall into an entirely different tariff provision than the finished product and may thus be excluded from a higher tariff.

Further, classification concepts are particularly useful for certain U.S. or other products that fall within the special HTSUS Chapter 98 provisions, many of which may enable importers to partially or fully avoid the additional tariffs. These provisions cover numerous types of products used for specific purposes as well as specific production or sourcing scenarios involving U.S. or previously imported components.

Operational Engineering. If you cannot modify the tariff classification for an imported product, explore changing its country of origin. For instance, CBP has found that the complex assembly of numerous parts, modules, or subassemblies into dedicated machines results in a substantial transformation of the components so that their country of origin is where the finished product was produced. So, in the case of the China tariffs, and in some cases the aluminum and steel tariffs, shifting operations away from one country to another may enable you to escape the duty increase.

Valuation. First sale valuation has long proven useful to industries that have been subject to high duties. Here duty is paid on the price a trading company pays the manufacturer instead of the higher price the importer pays the trading company. While additional tariffs still apply in this scenario, the dutiable value is significantly lower, resulting in a lower duty bill.

Various criteria must be met to ensure the first sale price reflects a sale that is clearly destined to the U.S. and conducted at arm’s length, but, once validated, a viable first sale value can provide substantial duty savings. It can also serve as a type of long-term annuity; i.e., even once the additional tariffs expire, use of first sale valuation would continue to provide a lower declared value and thus reduce the regular duties assessed on a company’s products.

Additionally, importers should examine whether certain amounts typically included in the price, such as buying commissions, shipping-related charges, inspection fees, and post-importation assembly charges, can be excluded from dutiable value.

Bonded Facilities and Movements. For those companies involved in manufacturing as well as import for export trade, bonded facilities are providing a safe haven from the additional tariffs. Goods admitted to a foreign-trade zone in privileged foreign status will retain their character and tariff classification as admitted even if they are manufactured into a product affected by the additional tariffs that may be withdrawn from the zone and exported out of the U.S. to avoid the tariffs. In addition, goods otherwise subject to the additional tariffs could be entered and stored in a bonded warehouse for up to five years to avoid those duties if they are (a) exported directly from the warehouse or (b) entered for U.S. consumption once the additional tariffs have lapsed or a product-specific exclusion has been granted. Temporary importation bonds and bonded movements also enable companies to avoid tariffs for products transiting or undergoing processing prior to exportation out of the U.S.

Duty Drawback. Drawback provides for the refund of 99 percent of duties and fees paid on imported goods that are subsequently exported and is available for section 301 duties. Although CBP is not paying drawback for section 232 duties it is unclear that the president had the authority to eliminate drawback under his import authority. Now, the stakes are even higher as CBP transitions from its core drawback process to the updated one provided by the Trade Facilitation and Trade Enforcement Act.

Section 321 De Minimis. CBP laws and regulations provide for a duty exemption for goods manifested at less than $800 fair retail value in the country of shipment if imported by one person on one day. Although it appears this option is not available for section 232 tariffs, CBP has confirmed that does apply for section 301 duties.  In assessing this opportunity, however, companies should carefully consider the accuracy of the information provided for such de minimis shipments to avoid cargo holds and possibly seizures due to other government agency or intellectual property compliance issues.

Importers, exporters, and manufacturers have a variety of ways to craft their own trade deals to effectively escape or limit the impact of the section 232 and 301 tariffs in an evolving landscape. A bit of flexibility and ingenuity can have a profound impact on a company’s bottom line when facing substantial duty exposure. 

Please visit www.strtrade.com to register for ST&R’s in-depth webinar on this topic and find the latest updates on the section 232 and 301 additional tariffs as well as the retaliatory duties imposed by U.S. trading partners.

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