Tariffs have become a favorite trade policy tool of President Donald Trump’s administration during his second year in office.
Since the spring, the administration has ushered in tariffs that will have significant effects for a range of industries, including global tariffs on steel and aluminum and tariffs targeting a variety of Chinese products. The administration has also begun a process that could lead to tariffs on automotive imports, and it has threatened to impose additional new tariffs on even more imports from China.
These new tariffs carry significant implications for companies throughout the supply chain of affected products. In light of recently implemented tariffs — and those still to come — trade compliance professionals should pay close attention to key risk areas, including product classification, country-of-origin labeling and valuation. In examining each of these issues, risk management personnel should also work to leverage opportunities with products that fall outside the scope of the tariffs.
Sparks Fly. The Trump administration’s flurry of tariff activity began in earnest in April 2017, when the U.S. Department of Commerce announced it was initiating an investigation into the implications of global steel and aluminum imports for U.S. national security. Commerce’s investigation, conducted pursuant to Section 232 of the Trade Expansion Act of 1962, resulted in January 2018 findings that both steel and aluminum threatened to impair the national security of the United States, paving the way for Trump’s March announcement of additional tariffs of 25 percent and 10 percent, respectively, on imports of steel and aluminum to the United States.
In the months that followed, the U.S. government negotiated with several trade partners that sought deals to avoid the imposition of tariffs on their exports. Ultimately, the Trump administration reached agreements to extend exemptions to steel products from Argentina, Australia, Brazil and South Korea and aluminum products from Argentina. Several key trade partners remain absent from the list of exemptions, including Canada, Mexico and the European Union, all of which have imposed retaliatory tariffs on U.S. imports in response.
The United States’ first round of China tariffs followed on July 6, with the U.S. Trade Representative implementing a 25 percent tariff on a wide range of Chinese products. Unlike the Section 232 metals tariffs, the China tariffs were imposed pursuant to Section 301 of the Trade Act of 1974, which authorizes USTR to investigate whether foreign trade practices are unfair.
USTR initiated an unfair trade practices investigation into Chinese trade practices in August 2017 and released its findings in March of this year, citing the Chinese government’s practices pressuring U.S. companies to license technology to Chinese businesses. In response, President Trump directed USTR to propose a list of Chinese products that would be subject to new tariffs on March 22. While the Trump administration initially delayed the new tariffs as it negotiated with Beijing over U.S. intellectual property security concerns, it announced on June 15 that it would impose a first round of tariffs on approximately $34 billion in Chinese goods starting on July 6. USTR’s June announcement also included a proposal for a second round of tariffs on approximately $16 billion in further Chinese imports, subject to public commentary and a hearing scheduled to take place on July 24.
Immediately after the first round of tariffs went into effect on July 6, the Chinese government imposed retaliatory duties on an equivalent value in U.S. imports, prompting the Trump administration to announce that it would explore an additional 10 percent tariff on approximately $200 billion more in Chinese products. USTR on July 10 formally announced plans for the additional tariffs and a Section 301 Committee public hearing to be held Aug. 20-23.
In May, Commerce announced it would launch another Section 232 investigation, this time into the national security implications of U.S. automobile and automotive part imports. Having solicited public commentary on the issue in June, Commerce will hold a hearing on the investigation Thursday and Friday. Section 232 allows Commerce until February to complete its investigation, but Secretary of Commerce Wilbur Ross said the review will likely conclude in July or August. President Trump, meanwhile, tweeted in June that the U.S. government would impose a 20 percent tariff on all cars assembled in the European Union unless the EU lifts its tariffs on imports of vehicles produced in the United States.
Compliance Considerations. With the United States and governments around the world imposing new tariffs in recent months, companies engaging in international trade face new tariff risks. Risk management officers at companies grappling with the new tariffs have responsibilities to ensure compliance and identify opportunities to navigate the new tariffs in a cost-effective manner.
Three areas of risk stand out among the challenges facing trade compliance personnel: product classification, country-of-origin determinations and valuation.
Customs laws in the United States and elsewhere require companies to identify each product’s classification pursuant to the Harmonized Tariff Schedule (HTS), as each country assigns tariffs based on these numbers. The heightened tariffs, applicable only to certain HTS classifications, may create the incentive for unscrupulous companies to misclassify products to avoid the tariffs. As such, compliance officers have independent obligations to be sure that classifications appear reasonable.
And on the cost savings side, companies would be wise to conduct careful technical examinations of their products to determine whether they are subject to the new tariffs.
Global customs laws also require companies to determine the country of origin of each product for the purpose of determining import duties. The United States uses a two-part country-of-origin assessment, considering whether a certain good was either wholly the product of a certain country or substantially transformed into a new and different article in a different country.
In instances in which products originate in one country and either undergo some amount of transformation or are integrated with parts from other countries, determining the proper country of origin for customs purposes can be a challenge. And given the recent rise in country-specific tariffs, U.S. Customs officials are likely to be closely monitoring country-of-origin determinations in particular, and companies have an obligation to ensure that their determinations are accurate.
A third source of potential risk involves the valuation of each product, as ad valorem tariffs require importers to pay a certain percentage of the stated value of their imports. Related company transfer pricing is likely to be scrutinized, and customs enforcement officials will be on high alert for potential mischaracterization of product values.
A Head Start. Trade compliance personnel can work to address each of the abovementioned areas of risk through proactive risk management by engaging in self-audits that target areas of heightened risk. These audits should include review of shipping documentation, sampling of high-impact classifications, review of country-of-origin determinations, coordination with the tax department on transfer pricing reviews and checking entry documents. Also included in an audit should be an evaluation of how companies interact with supply chain partners and identification of which party is responsible for the various data elements reported to customs authorities. Self-audits should also confirm whether companies comply with record-keeping obligations.
Having assessed risk areas, companies have a few options to proactively address and minimize the tariffs’ impact. First, in the United States, companies that are uncertain about an issue of classification can request an official ruling from Customs. Second, if classification, origin, valuation or other mistakes are uncovered, companies can disclose those issues to the authorities, often in exchange for leniency. And finally, companies should review the adequacy of their compliance systems, as government authorities will seek to maximize tariff revenues.
Companies dealing with products potentially affected by any of the new tariffs must also understand the tariffs’ implications for existing and future supply chain contracts. Those engaging in cross-border transactions involving products that are subject to the new tariffs should review their various contracts to determine their rights and responsibilities with respect to the payment of import duties.
In doing so, companies should pay particularly close attention to provisions pertaining to pricing and any responsibility for paying additional taxes or fees. Disputes could arise, and contracts may need to be renegotiated.
In addition, the U.S. government has established tariff exclusion request processes for both the steel and aluminum tariffs and the tariffs on Chinese imports. In the former instance, companies that can effectively demonstrate that they require steel or aluminum products not made — or not sufficiently available — in the United States may be eligible for a tariff exclusion. Thus far, companies have submitted more than 13,000 requests for exclusion from the steel tariffs and 2,000 requests under the aluminum tariffs. Commerce has granted some requests and continues to review applications on a rolling basis.
When it comes to the China tariffs, companies seeking an exclusion must show (i) they require products that are not strategically important to the Chinese government (such as through the “Made in China 2025” program); (ii) the products are available only from Chinese sources; and/or (iii) the additional duties would cause “severe economic harm” to either the requestor or other U.S. interests. Few companies have requested exclusions from the China tariffs thus far, as USTR only recently posted its instructions for doing so.
The new U.S. tariffs and resulting reciprocal tariffs put in place by U.S. trading partners increase risks for any company engaging in cross-border commerce. With large amounts of duties at stake, compliance managers should be sure they have robust internal controls and should also re-examine their supply chains for any potential cost savings opportunities.
Most importantly, the international trade community needs to be prepared for compliance programs to fall under greater scrutiny than ever before.
F. Amanda DeBusk is chair of Dechert’s global International Trade and Government Regulation practice, focusing on matters relating to U.S. international trade regulations, export controls, sanctions and trade compliance, and the former U.S. Commerce Department assistant secretary for Export Enforcement. She can be reached by email at amanda.debusk@dechert.com.
Jacob Grubman is an associate in Dechert’s global litigation practice, with particular emphasis on international trade, internal investigations and securities enforcement. He can be reached by email at jacob.grubman@dechert.com.