Claiming that tariff exemptions could influence the U.S. foreign-trade zones program, the Office of the U.S. Trade Representative has resisted calls by the National Association of Foreign Trade Zones (NAFTZ) to include language in its Section 301 China duty orders that would exempt several goods substantially transformed in an FTZ from incurring duties, NAFTZ President Erik Autor said Tuesday during the annual NAFTZ conference in Atlanta.
NAFTZ wants USTR to specify that FTZ manufactured goods are exempt from Section 301 duties applied upon the goods’ entry for consumption merely because of manufacture in a U.S. FTZ, Autor and Rockefeller Group Foreign Trade Zone Services Managing Director Rebecca Williams said during the conference.
USTR on Friday published a notice establishing a third tranche of Section 301 tariffs, covering approximately $200 billion worth of Chinese-origin goods, which will start being collected on Monday.
The tariffs will start at 10 percent and rise to 25 percent on Jan. 1.
“For reasons that were not entirely clear,” Autor said, USTR refused U.S. Customs and Border Protection’s request to include in the first two Section 301 tariff orders and Section 201 tariff orders for solar cells and washing machines this language included in Section 232 duties on steel and aluminum:
“Articles shall not be subject upon entry for consumption to duties established under this [proclamation or order], merely by reason of manufacture in a U.S. foreign trade zone.”
USTR also omitted the requested language from its third Section 301 tariff order.
“We’ve been sitting on the edge of our seats, hoping that that Federal Register notice came out with that sentence, and it didn’t,” Williams said in an interview with American Shipper. “So [we’re] pretty deflated, but we’ll keep chugging along and hope to finally get the resolution that we seek.”
USTR didn’t respond to an American Shipper request for comment.
Autor and other NAFTZ members met with USTR General Counsel Stephen Vaughn and two colleagues on Sept. 6, where NAFTZ stressed that final products manufactured and substantially transformed in a U.S. are legally products of the United States, “just as if they had been produced in a U.S. factory outside a zone,” according to a Sept. 10 follow up letter from Autor to Vaughn.
Vaughn had said that USTR doesn’t want to do anything that will either “promote or hinder” use of the FTZ program, Autor recounted during the NAFTZ conference.
But NAFTZ’s response is that USTR’s failure to include the requested language is disincentivizing use of the FTZ program, Autor said.
“Customs is operating from two different sets of guidance,” Autor said. One is the Section 232 tariff orders’ language that specifically exempts FTZ-manufactured goods from duties, and then the Section 301 and Section 201 orders’ language that is based on a USTR rejection for inclusion.
The underlying issue is that goods manufactured in FTZs could incur duties both on components and their finished products.
Imports covered by all trade remedies, including Section 201, Section 232, and Section 301 duties, must be admitted to FTZs in “privileged foreign status” if admitted on or after the effective date of the tariffs, Williams pointed out during the conference.
“PF status” is a legal status that locks in the Harmonized Tariff Schedule (HTS) classification of the merchandise as admitted to the FTZ and ensures payment of both normal duties and additional trade remedy duties upon U.S. consumption entry filings at the time of withdrawal from the FTZ.
So for manufacturing FTZs, this means that duties are paid on inputs subject to Section 301 tariffs, as those inputs are listed separately on entry documentation according to the PF status guidelines.
General Census Bureau guidance for submitting statistical data instructs FTZ filers to report on entry documentation the country associated with the greatest aggregate value of the foreign components, according to Williams.
“It’s a summation of the values from the various countries of origin, and then whichever one represents the highest, typically, that’s what software programs to report that country of origin for the finished good,” she said.
Goods manufactured in FTZs can comprise both non-PF status inputs (which are not subject to Section 301 tariffs) and PF status inputs.
So, a major problem comes into play when an FTZ-manufactured product is on the Section 301 list, in which case that finished product, in addition to the individual “PF status” components, will be treated for tariff purposes as Chinese-origin, if the greatest aggregate value of the individual components is derived from China.
This means that duties would be collected against both inputs and the finished product, even though that product underwent substantial transformation in a U.S. FTZ, Williams said.
In cases of finished products, duties would also essentially be applied against the non-PF status components used in those products’ manufacturing, even though the Section 301 tariffs don’t apply to non-PF components.
USTR has been a “sticking point” as NAFTZ seeks relief for its members, Autor said. “They’re the ones that need to act.”