More Tariffs: New Tariffs Target Chinese Imports

June 15, 2018

The U.S. Trade Representative (USTR) announced 25% tariffs on Chinese goods on June 15, targeting industrial goods that amount to roughly US$34 billion in annual exports to the United States, with a review underway for an additional US$16 billion in imports. This announcement marks the latest in a series of tariff moves by the Trump Administration, following on the heels of global tariffs on steel and aluminum. China has announced that it will retaliate against U.S. imports. 

While ongoing negotiations may ultimately prevent the imposition of these tariffs on Chinese imports, tariffs are a favorite trade policy tool for the Trump Administration. The tariffs will affect trade volume, but current trade levels suggest that the tariffs on Chinese products could drive more than US$12 billion in revenue to the U.S. government. This comes on top of over US$8 billion that the U.S. Treasury could receive from steel and aluminum tariffs. With roughly US$20 billion in tariff revenues at stake, risk management personnel should expect more enforcement actions as regulators scrutinize whether tariffs are being properly assessed. Internal reviews of protocols for country-of-origin labeling, classification, and valuation are in order. 

This OnPoint describes the new tariffs on Chinese imports and provides background on the steel and aluminum tariffs. We then discuss key implications for risk management personnel and offer guidance on best practices for mitigating risks. 

Background on Section 301 Tariffs 

The Chinese tariffs are slated to be imposed on July 6 under Section 301 of the Trade Act of 1974 (the Trade Act), which authorizes USTR to investigate whether foreign trade practices are unfair. In March 2018, USTR released findings concluding that “China forces U.S. companies seeking to license technologies to Chinese entities to do so on non-market based terms.” USTR cited “foreign ownership restrictions”; pressure from the Chinese government in licensing negotiations, including forced transfers of intellectual property; the Chinese government’s acquisition of U.S. companies; and state-backed computer hacking as among the practices justifying new tariffs on Chinese products. 

President Trump initially directed USTR to propose a list of Chinese products that would be subject to new tariffs on March 22, 2018, with administration officials estimating that the goods would account for more than US$46 billion in annual exports. In May, the Trump Administration announced that it would delay the implementation of the new tariffs while it continued negotiations with the Chinese government to address U.S. intellectual property security concerns. With these negotiations stalled, the Trump Administration has moved ahead to announce the imposition of the tariffs, and the Chinese government will reportedly impose equivalent tariffs on U.S. imports. 

The new tariffs on Chinese imports are scheduled to take effect in two waves. USTR announced that U.S. Customs and Border Protection (CBP) would begin to collect the new duties on approximately US$34 billion in Chinese goods starting on July 6, 2018. USTR’s announcement also included proposals for tariffs on around US$16 billion in other products, which will undergo a period of public commentary. 

Steel and Aluminum Tariffs 

The tariffs on Chinese imports come just weeks after President Trump announced the imposition of global tariffs on steel and aluminum pursuant to Section 232 of the Trade Expansion Act of 1962. That provision grants the U.S. Department of Commerce authority to initiate investigations into the effects of imports on U.S. national security, and the Commerce Department found in January 2018 that both steel and aluminum “threaten[ed] to impair the national security” of the United States. President Trump announced an impending 25% tariff on steel imports and 10% tariff on aluminum imports in March. 

Over the following two months, the U.S. government engaged in negotiations with several trade partners. After exempting several trade partners in May, the Trump Administration announced on May 31, 2018, that it was lifting the suspension of steel and aluminum tariffs on imports from Canada, Mexico, and the European Union, effective on June 1. All three have announced retaliatory tariffs, which are currently set to take effect in July 2018. Exemptions continue to apply for steel imports from Argentina, Australia, Brazil, and South Korea and for aluminum imports from Argentina. 

Possible Automotive Tariffs 

Meanwhile, the Trump Administration has initiated steps to explore further tariffs on auto imports under Section 232 of the Trade Expansion Act. On May 23, 2018, the Commerce Department announced an investigation into the effects of automobile and automotive parts on U.S. national security, which will proceed under the same framework as the recently announced tariffs on steel and aluminum. The Commerce Department is soliciting written comments until June 22, and a public hearing is scheduled for July 19-20. 

Risk Management Considerations

If trade levels remain constant, the Chinese import tariffs could generate US$12.5 billion for the U.S. Treasury, on top of US$8.2 billion in revenue driven by the tariffs on steel and aluminum (excluding the currently exempted trade partners). With such a large amount at stake, there will doubtless be efforts to avoid the tariffs, and the U.S. government is ramping up customs enforcement activity. To effectively mitigate potential issues, compliance personnel should pay especially close attention to three areas of risk: 

  • Product Classification: Under existing customs laws, companies must identify each product’s classification pursuant to the U.S. Harmonized Tariff Schedule (HTS). The tariffs are based on the HTS numbers. Any HTS misclassifications that result in under payment of duties could result in fines and penalties. 

  • Country-of-Origin Labeling: U.S. law requires companies to determine each product’s country of origin by assessing whether the product was (1) wholly the product of a certain country or (2) substantially transformed into a new and different article elsewhere. Where items are made from parts sourced from various countries, it may be difficult to determine the proper origin. Customs authorities are on alert for any errors, especially if they suspect duty evasion. 

  • Valuation: With tariffs assessed based on each product’s value, companies need to be sure that their valuation methodology is sound. This is particularly important to consider when there is transfer pricing between related companies. 

Risk management professionals can address each of these concerns by engaging in proactive risk assessment to understand the scope of impacted products and duties owed. Self-audits enable risk management personnel to identify areas of heightened risk and should include a detailed review of relevant shipment documentation (including country-of-origin documentation, production and inventory records, and invoices). If there is confusion about classification, a company may need to get an official ruling from U.S. Customs and Border Protection. U.S. authorities expect companies to have systems in place to check how foreign exporters determine origin, and companies should work to clarify responsibilities for determining classifications. In addition, adequate documentation must support valuation decisions. Where tariffs are high, risk managers should insist that country of origin and classifications be checked so that companies do not overpay. 

How Dechert Can Help 

With a wealth of international trade experience in the United States and abroad, Dechert is available to advise clients on managing risks emerging from tariffs. We regularly assist clients in conducting internal audits, establishing improved compliance plans and programs, submitting disclosures of prior violations that mitigate penalties, and defending in penalty proceedings.

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