The Art of the Trade Deal 2.0 – Update on Top Strategies to Avoid or Reduce Section 232 and 301 Duty Increases
November 14, 2018: this article was updated with additional resources at bottom.
U.S. importers, exporters, and manufacturers are continuing to look for ways to mitigate the impact of the 10 to 25 percent additional tariffs the U.S. has levied on tens of billions of dollars’ worth of imported goods, including steel and aluminum from all global sources and hundreds of products from China, as well as the retaliatory tariffs U.S. trading partners are imposing on U.S. exports. Despite on-going policy changes, there are a number of proven and legitimate ways to avoid or reduce these duties that companies are beginning to use with great success. This article provides an update on several duty-busting strategies that companies can use in structuring their own trade deals.
[Click here to register for our upcoming webinar examining these topics in more detail. Click here for ST&R’s web page providing comprehensive information on all U.S. tariffs imposed under Section 301 and Section 232 as well as the retaliatory tariffs trading partners are levying on U.S. goods.]
Exclusion Requests. Both the Department of Commerce (for aluminum and steel) and the Office of the U.S. Trade Representative (for China goods) have implemented processes to accept requests that specific products be excluded from the tariffs. These processes offer companies or trade associations an opportunity to explain how and why particular goods are critical to the U.S. economy and could not be sourced elsewhere. The DOC has outright rejected requests that do not adhere to the specific criteria but granted exclusions in other cases. USTR has yet to respond to product-specific requests for exclusion from the Section 301 tariffs on $34 billion worth of imports from China (the so-called list 1 tariffs) and the deadline for submitting such requests is Oct. 9. However, the DOC recently announced that it will also accept requests for exclusions from the import quotas on steel and aluminum from the few countries that negotiated such quotas and USTR could soon begin accepting Section 301 tariff exclusion requests for an additional $16 billion worth of Chinese goods (the so-called list 2 tariffs).
Tariff Engineering. As much as U.S. Customs and Border Protection has resisted the idea in the past, the courts have affirmed for years that CBP can only levy tariffs on the condition of goods 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, products ranging from turbine generators and split system air conditioners that are typically imported into the U.S. complete will now likely be subject to an additional 25 percent tariff. However, if the components of such goods are imported separately they would fall into an entirely different tariff provision that is currently excluded from that tariff increase. Despite the government’s recent narrowing of its policy, classification concepts are 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.
Operational Engineering. If you cannot modify the tariff provision for an imported product you might be able to change its country of origin. For instance, CBP has found that the assembly of numerous parts to create various modules or motors, and their subsequent assembly into engines or dedicated machines, results in a substantial transformation of the parts so that their country of origin is where the finished product is produced. Shifting key operations from one country to another may thus enable your company to escape a duty increase.
Valuation. First sale valuation is a strategy that has long proven useful to industries that have been subject to high duties. Importers only pay duty on the price that a trading company pays the manufacturer instead of the higher price the importer pays the trading company. While the additional tariffs would 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.
Bonded Facilities. 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 entered for U.S. consumption. 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.
Duty Drawback. Drawback, which provides for the refund of 99 percent of duties and fees paid on goods imported into the U.S. that are subsequently exported, 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 regulatory process to the broader one provided for under 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, CBP has confirmed that it applies to section 301 duties. In assessing this opportunity, parties should carefully consider the accuracy of the information provided for de minimis shipments to avoid cargo holds and possibly seizures due to partner government agency or intellectual property compliance issues.
When assessing particular duty savings models, importers, exporters, and manufacturers need to consider the art of crafting their own trade deals to effectively escape or limit the impact of the section 232 and 301 tariffs. A bit of flexibility and ingenuity can have a profound impact on a company’s bottom line when facing substantial duty exposure.