Navigating Today’s Trade Risks

 

The United States collected a record $7 billion in import tariffs in the month of September as new duties went into effect on apparel, tools, electronics and other consumer goods from China, according to recent data reported in the Wall Street Journal.  This sharp rise was driven by a new 15% tariff imposed on consumer goods as of September 1st, cites the WSJ article. Although the U.S. already had been collecting tariffs on some items, under the Trump administration duties have risen with a new series of levies against China in an effort to curtail trade practices harmful to businesses in the U.S.

In this article, we take a look at the trade remedies traditionally available in the U.S. and measures that have been taken in the last few years to level the playing field with Chinese imports, as well as the impact these tariffs are having on customs brokers, and measures brokers and importers can take to mitigate losses in today’s trade climate.

Trade Remedies

Global agreements under the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) have traditionally been the preferred method of settling disputes. The U.S. and other member countries can bring complaints before the WTO seeking trade remedies for unfair practices that are typically instigated by local businesses or because of business concerns. For example, the U.S. may file a complaint with the WTO against another member country claiming its subsidies on a specific import are hurting the U.S. industry, and argue that, as a result of these subsidies, there should be additional duties imposed.

Antidumping & Countervailing Duties (Section 731 and 701 – Tariff Act 1930)

The U.S. can also take unilateral action against a country for unfair trade practices, which typically involves a much more expeditious process than bringing disputes before the WTO or NAFTA, including the levy of antidumping and countervailing duties. Dumping involves companies exporting goods at prices lower than those at which they sell in their home market. For an antidumping investigation to be initiated, local businesses must demonstrate evidence of dumping, injury to themselves and a causal link between the dumped prices and the injury to them. Countervailing is a mechanism designed to offset the unfair domestic market advantage foreign suppliers and manufacturers gain from their governments that grant them subsidies for imports to the U.S. The trade remedy of these predatory actions is to calculate the dollar impact and elevate the landed cost of those imports with additional duties. The United States International Trade Commission (USITC) determines whether the imports are injuring or likely injuring the domestic industry; the International Trade Administration (ITA) calculates what the dumping and countervailing rate should be to elevate the landing cost.

An example of unilateral action taken by the U.S. is President Trump’s decision in early 2018 to impose tariffs on steel and aluminum imports, singling out China as a top offender in an effort to curb what the President called unfair trade practices.

Provisions in the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) also provide support to the U.S. Customs and Border Protection (CBP) to ensure a fair and competitive trade environment, including the ability to pursue allegations of evasion. An evasion allegation includes transshipping where a country exports a product to another country after it passes it through a third country. This is illegal when done to falsify or disguise the product’s country of origin and to evade duties and tariffs.

Intellectual Property Violations (Section 337 – Tariff Act of 1930)

This law protects utility/design patents, copyrights and trademarks on everything from music to books and technology. The USITC administers all reviews of intellectual property (IP) violation allegations and determines whether there is a violation. If the accused imports are determined to infringe upon a valid and enforceable U.S. patent, copyright, or registered trademark, the USITC may issue orders excluding the products from entry into the country and/or directing the violating parties to cease and desist from certain actions. The President can decide whether to concur or disagree with the USITC’s findings.

Safeguard Measures (Section 201-204 – Trade Act of 1974)

Seldom used in the past, safeguard measures are intended to give temporary but broad-based relief to industries suffering severe injury from a surge in imports. The ITC performs an analysis to determine whether relevant imports are, or threaten to be, a cause of injury to the domestic industry. If a positive determination is made, the ITC then makes recommendations to the President as to the type of remedy that would provide import relief. The Trump Administration, for example, used safeguard measures in 2018 against imports of large residential washers and crystalline silicon photovoltaic cells deemed to injure, or potentially injure, the domestic industry.

There are also safeguard measures specific to China (Section 421) to help U.S. industries and workers deal with import surges from China. In 2009, Obama imposed increased tariffs on Chinese tires for three years based on the ITC’s findings of domestic market disruption.

Threats to National Security (Section 232 of the Trade Expansion Act of 1962)

If it is deemed that U.S. national security is threatened because of low import prices, the Secretary of Commerce can investigate imports and take actions to limit or restrict them. To date, this provision has been used for steel and aluminum, although investigations involving uranium and automobiles/auto parts are currently ongoing. Tariffs are currently set at 10% for aluminum and 25% for steel.

Unjustified, Unreasonable or Discriminatory Foreign Government Actions (Section 301 – Trade Act of 1974)

Section 301 applies specifically to China after it was determined that its government was using unfair practices, including:

1. The use of joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to force or pressure technology transfers from U.S. companies to a Chinese entity
2. Maintaining unfair licensing practices preventing U.S. firms from getting market-based returns on IP
3. Directing and facilitating investments and acquisitions which generate large-scale technology and IP transfers to support industrial policy goals
4. Conducting and supporting cyber intrusions into U.S. computer networks to gain access to valuable business information

As a result of these practices, higher tariffs were imposed on Chinese products in phases beginning in July 2018. In fact, the U.S. has imposed levies on $360 billion worth of Chinese goods, and the last round is scheduled for December 2019. Up to now, these duties have been less visible to consumers; however, the last round of product tariffs, scheduled to take effect December 15, involve consumer electronics and apparel where the Chinese market represents more than 75% of U.S. imports. These goods are facing a 15% tariff unless the President delays imposing them or renegotiates with China.

Even so, as of this article’s publication date, analysts expect that America’s tariffs could potentially be phased out over time if China meets certain benchmarks and demonstrates that it is keeping its commitments to respect American intellectual property, open its markets to foreign firms and purchase billions of dollars of agricultural product from the United States. Some levies already in place could also be rolled back depending on future negotiations between the two governments. Still, this is all speculation with conflicting reports emerging from both countries prior to the negotiations.

Customs Brokers, Freight Forwarders: Mitigating Risk

Customs brokers must ensure that every time tariff rates change, they are reporting the right information to Customs and the client is informed of the new duty rate and what is owed. Trade changes and trade remedy actions are occurring from one month to the next, making the need for up-to-date software critical. One mistake can result in a negligence (Errors & Omission) claim from the client alleging that an error cost the firm money.

Another important area for brokers is surety bond sufficiency. The size of the bond depends on the duties, taxes and fees paid annually. If the CBP deems your bond is insufficient, your supply-chain may be adversely impacted and unexpected costs incurred. The government requires the bond to be no less than 10% of annual duties, taxes and fees. If, for example, there is an increase in the duties, the bond amount you purchase should be increased to reflect the tariff change. In most cases, CBP will issue a bond insufficiency notice giving you 30 days from the date of the notice to increase the bond amount. If the bond deficiency is considered egregious, there may be no notice.  Of course, if a bond is terminated, your supply chain could be negatively impacted with goods being held until the bond amount has been increased. You may also incur additional costs for demurrage and storage if the goods are sent to a general order warehouse. Additionally, if your goods are not getting to their intended destination, there may be consequential costs involving production delays on behalf of your customers, as well as breakage or spoilage.

Importers should also be aware that the government is seeking stronger protection with risk-based bonding. Beginning next year, in addition to purchasing a surety bond, importers who have never had experience importing antidumping or countervailing products will be subject to a risk-based bonding at a rate of 25% of the product’s value. This additional bonding is designed to protect against new importers who typically have losses.

Additional duties may also necessitate a greater amount of cargo insurance if you are to factor in duties in the insured value.  Be sure to look at this carefully.

Other steps importers can take to prepare and adapt to a changing trade environment is to seek exemptions from tariffs, be vigilant regarding tariff classification, negotiate with suppliers to absorb some or all of the tariffs, consider new sources of your goods, make judicious use of privilege-foreign vs. non-privilege foreign status to lock in lower duties, and determine where you may be able to trim costs and raise prices.

Roanoke Trade specializes in providing insurance and surety solutions for customs brokers, freight forwarders and property brokers, third-party logistic providers, and enterprises with global supply chains.  For more information about our solutions, please contact us.

Sources: Wall Street Journal, NY Times, WTO, CPB, Homeland Security

 

About the Author

Matt Zehner is Vice President, Surety Information & Analysis for Roanoke and has been involved in the international trade segment of the insurance field for over 25 years. Matt is involved with Roanoke’s Customs and OTI Bonds products which includes monitoring current events for changes in the legal and regulatory environment and working closely with federal agencies and industry trade associations concerning changes impacting the international trade industry and its surety products.