Strategies to Avoid or Reduce Section 232 and 301 Duty Increases (Guest Article)
By Charles “Chuck” Crowley
Practice Leader, Global Customs and International Trade
Sandler, Travis & Rosenberg, P.A.
Despite protests by affected companies and sporadic intergovernmental negotiations, U.S. importers, exporters and manufacturers continue to be burdened by the additional tariffs the Trump administration has imposed on hundreds of billions of dollars’ worth of imported goods. However, there are a number of proven and legitimate ways to avoid or reduce these duties that have been used for many years with great success. This article highlights duty-busting strategies companies can use in structuring their own trade deals.
Both the Department of Commerce (for the Section 232 aluminum and steel tariffs) and the Office of the U.S. Trade Representative (USTR) (for the Section 301 tariffs on goods from China) have set forth processes to request that specific products be excluded 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. As the Department of Commerce (DOC) has been slow to respond to the thousands of submitted requests and has outright rejected any claims that do not adhere to the specific criteria, we remain cautiously optimistic about the speed and manner in which USTR will review the China-related exclusion requests. Nevertheless, as this process may allow for an outright exclusion from the duties on a per product and per company basis, it is worth serious consideration.
As much as U.S. Customs and Border Protection (CBP) has resisted it in the past, the courts have affirmed for years that it 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, turbine generators are typically imported into the U.S. as large unassembled structures consisting of the turbine and generating components and as such will now likely fall prey to an additional 25% tariff. However, if the components are imported separately they would fall into an entirely different tariff provision that is currently excluded from that tariff increase.
If you cannot modify the tariff provision for the imported product, consider changing its country of origin. For instance, CBP 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 would be the country where the engine 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 your company to escape the duty increase. These concepts are particularly useful for certain U.S. or other products that fall within the special Harmonized Tariff Schedule of the United States Annotated (HTSUS) Chapter 98 provisions, many of which are wholly or partially exempt from the additional tariffs.
A strategy that has proven useful to the apparel and footwear industries, which have been subject to high duties for years, involves first sale valuation. Here 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; however, once validated a viable first sale value can provide substantial duty savings. It can also serve as a type of long-term annuity; that is, 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.
For those companies involved in manufacturing as well as import for export trade, bonded facilities can provide 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.
Drawback, which provides for the refund of 99% 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 possible 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.
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Contact the author, Chuck Crowley, at email@example.com or (212) 549-0134 to learn more about the best mitigation strategies for your company. For guidance specific to transfer pricing and related multinational tax issues, contact Josh Finfrock at firstname.lastname@example.org or (949) 783-1839. These professionals will welcome your call.