China Tariffs Drive Need for Mindful Trade Compliance

Right now, there are tariffs in place or pending to December on about $500 million in annual U.S. imports from China. The United States-China trade dispute escalated in August with an increase in existing and future tariffs on Chinese imports after Beijing placed retaliatory tariffs on $75 billion in annual exports of U.S. goods. A 15 percent tariff levied Sept. 1 includes most consumer electronics, such as TVs, digital cameras, smart watches and mobile phones.

Other tariffs at 25 percent applied to $250 billion in Chinese imports were scheduled for an increase to 30 percent on Oct. 1. That scheduled increase was delayed until Oct. 15. Meanwhile, $160 billion in products granted a temporary tariff reprieve are subject to a new tariff initially scheduled for 10 percent but now increasing to 25 percent, effective Dec. 15.

This trade dispute has seen tariffs imposed or increased by both China and the United States against each other. We have seen rounds of retaliatory escalation, but also delayed implementation and continued high-level trade discussions.

Delays in tariff implementation and continuing trade talks are encouraging. Hopefully, the delays will move the parties towards productive trade negotiations and end retaliatory tariff actions.

The Nature of the Tariffs

The Office of the U.S. Trade Representative (USTR) released notices on China tariffs across $550 billion worth of goods as noted below. The tariffs apply to almost every import from China.

Despite the tariffs, vessels leaving Asia are full. The Journal of Commerce reports recent increases in spot rates. Importers have little choice but to reserve available space or risk paying higher spot freight rates when they peak to meet Christmas delivery schedules.

From the Office of the U.S. Trade Representative (USTR), "On September 19 and 20, deputy-level negotiators from the United States and China met in Washington, D.C., to continue discussions aimed at improving the trade relationship between the two countries. These discussions were productive, and the United States looks forward to welcoming a delegation from China for principal-level meetings in October."

Trade & Tariff Outcomes

The primary outcome of tariffs is a higher landed cost for goods imported from China. Tariffs are fees collected by the U.S. Government when goods arrive from overseas. The top 10 importers of products made in China are Walmart, Target, Home Depot, Lowes, Dole Foods, Samsung American, Family Dollar/Dollar Tree, LG Group, Philips Electronics NA and Ikea International. These firms operate primarily in retail, produce and electronics.

There are several possible pricing outcomes. First, most retailers will try to maintain margins while staying competitive on price. If goods are available domestically or from a foreign country with lower tariffs, the products might come from those countries. Overseas, manufacturing plants in Vietnam, Indonesia, Taiwan, Thailand or Malaysia may produce similar goods.

While tariffs do end up in the U.S. Treasury, an unfortunate side effect might be higher prices paid by consumers. Another outcome might be reduced quantities sold if consumers find an alternative product to buy or choose not to buy in anticipation of a resolution of the trade dispute.

In a company statement, Walmart Chief Financial Officer Brett Biggs said, “We will do everything we can to keep prices low, but increased tariffs lead to increased prices.”

Factors to Consider when Trading with China

  • Engineering & Reclassifying Good

Tariff Engineering redesigns a product to avoid high-tariff components or change the origin of elements to low-tariff regions. However, as tariffs and trade negotiations turn, the benefit can evaporate.

A different option is to reclassify products to evade tariffs. Your request to reclassify a product might alert U.S. Customs and Border Protection (CBP) and spur questions about why the product was reclassified.

  • Financial Lenders & Credit

Importers may need to ask for more extensive lines of credit to pay the higher item costs because of the tariffs. Companies should consider keeping goods on-order and continue to receive shipments. They should do this to avoid potentially higher tariffs and possible out-of-stock situations on retail shelves.

What Can You Do About Trade & Tariffs?

Lack of certainty can reduce confidence along the supply chain. Right now, businesses hope the sides will resolve the current trade disputes and keep tariffs low. In the meantime, companies are taking action to understand their risks and options. In the face of volatile trade and tariffs, there are steps that importers can take, such as:

  • Review rates and consider rebidding.
  • Evaluate margins and what costs you might absorb or pass on.
  • Look for sources in countries with lower tariffs and outside of any trade dispute.
  • Establish and train an international trade compliance team.
  • Review all current HTS codes to ensure proper classification.
  • Review each imported item’s tariff classification that may allow for tariff avoidance.
  • Seek exclusion from tariffs from the Commerce Department or the U.S. Trade Representative
  • Procure goods or materials early before higher tariffs apply.
  • Improve technology and process to enable quick sourcing decisions and alternate suppliers.
  • Consider and investigate measures to delay duties to minimize working capital impact, i.e. Free Trade Zones.

Trade Enforcement

CBP statistics show trade enforcement and "trade remedy" measures, such as duty assessments, generated significant revenue.

Below is a partial list of the annual financial impact as of October 2019:

  • Section 301 Duty Assessment on imports from China: $31.8 billion
  • Section 232 Duty Assessment on steel: $6.27 billion
  • Section 232 Duty Assessment on aluminum: $1.8 billion
  • Section 201 Duty Assessment on washing machines: $165 million
  • Section 201 Duty Assessment on washing machine parts: $1.4 million
  • Section 201 Duty Assessment on solar panels: $946 million

In addition to tariffs, companies are open to audit, financial penalty and product seizure. In 2018, CBP completed 435 audits, issued 1,385 trade penalties, and did 50,952 import seizures, including 33,810 Intellectual Property Rights seizures.

Products found to be generated through the use or forced labor are in jeopardy of becoming a CBP statistics, too. On Sept. 30, CBP issued five Withhold Release Orders (WROs) covering five different products, imported from five different nations, including China. The action was based on CBP’s determination that the products are produced, in whole or in part, using forced labor.

“Under U.S. law, it is illegal to import goods into the U.S that are made wholly or in part by forced labor, which includes convict labor, indentured labor, and forced or indentured child labor. When sufficient information is available, CBP may detain goods believed to have been produced with forced labor by issuing a WRO,” according to a release issued by CBP.

Maintaining Trade Compliance

Transportation Insight advises retailers, manufacturers and distributors to understand global trade issues and risks. It helps importers and exporters protect goods, trade privileges and sustain global operations.

We encourage clients engaged in global trade to ask themselves these questions:

  • Does your company have an up to date, defensible compliance program that will withstand U.S. Customs scrutiny?
  • Are there company-wide import and export records retention policies and audited defensible compliance?
  • Do you understand social compliance and trading partner standards?
  • Can you verify the end-user against any re-export restrictions risks

Transportation Insight offers an in-depth "Compliance Assessment" that provides regulatory awareness, clarifies the risk and closes gaps in compliance.

Beyond policy shifts, with every modification to U.S trade regulations and processes, shippers face financial harm from non-compliance. Volatility is here to stay, and companies cannot wait to get their house in order.

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