Amid trade tensions with China and the European Union, US shippers have several remedies at their disposal to lower their duties that often go underutilized.
In other words, shippers are paying more in tariffs to the US government than necessary because they are foregoing savings at their disposal. The reason often is the shipper doesn’t know about their options or handle the bureaucratic red tape.
The US has applied import tariffs on more than $250 billion worth of Chinese-made goods. Supply chains were upended last winter, when shippers believed those tariffs would rise from 10 percent to 25 percent, causing a significant front-loading of cargo in December. US President Donald Trump then paused the increase, leaving the 10 percent duty in place. Politico has reported that Trump and Chinese President Xi Jinping are nearing a deal to roll back tariffs, which could be signed as soon as May 8. But the deal is far from guaranteed, and beneficial cargo owners (BCOs) must continue to pay duties on a long list of Chinese goods until an agreement is finalized.
Across the Atlantic, the US is also embroiled in a trade-related tiff with Europe that began after the World Trade Organization determined the European Union subsidized aerospace manufacturer Airbus, a dispute that has spanned the last 15 years. The Trump administration responded to the ruling by threatening to impose tariffs on $11 billion in European goods, including helicopters, French wine and champagne, cheese, and motorcycles. The Commerce Department also recently submitted to the president the results of its investigation into the national security implications of global automobile and parts imports under Section 232 of the Trade Expansion Act of 1962 that could result in tariffs being applied on all auto imports, including those made in the EU.
Tariffs are a hardship on small businesses that must pay tariffs and customs surety bonds, which guarantee duties and taxes will be paid even if an importer becomes insolvent. Importers are required to maintain a continuous bond of 10 percent of total duties and taxes paid to US Customs and Border Protection (CBP) annually with a $50,000 minimum. But as duties go up, so does the 10 percent liability upon businesses.
There are several options for shippers looking to mitigate the impact of the increased tariffs, but it’s really best to consult with a trade compliance specialist to understand the various different avenues and which are most applicable.
To qualify for a 9802 exemption — the number refers to the section of the Harmonized Tariff Schedule of the United States covering the issue — an item’s components must be sourced and manufactured in the US and exported abroad, where it is assembled without additional fabrication. Examples of approved assembly methods include welding, soldering, riveting, glueing, fastening, and laminating. Once the item returns to the US, the importer can claim a tariff exemption.
Derek McKenny, Southeast regional director for Kuehne + Nagel, explains how this program works using an example of a Chinese-made water filter. The carbon cannot be sourced in China, so the US product is shipped to China where it’s dusted off, oiled, and dropped into the filter, then sent back to the US. The item isn’t improved or increased in value, so the shipper can apply for an exemption on the value of the carbon.
“Let’s say the completed filter is worth $1, [and] the carbon is worth 25 cents. We can deduct the 25 cents of US content from the entered value payable to Customs. So instead of paying 10 percent on $1, you’re paying 10 percent on 75 cents,” McKenny said at the 2019 Jaxport Logistics and Intermodal Conference.
Even so, Customs has very specific terms and conditions with regard to documentation, so shippers should consult a professional before deciding whether applying for a 9802 exemption makes sense for them.
Dating back to the 1990s, the First Sale rule is a tariff reduction measure that applies to the importer of record on an item that was part of a multi-tiered transaction. For example, if an overseas manufacturer sells an item for $10,000 to another foreign company, then a US importer buys the item from that company for $15,000, the importer can pay the tariff based on the original $10,000 sale price, rather than the $15,000 it paid.
Jason Nichols, director of import compliance for Tapestry, explained how his company uses multi-tiered transactions to lower their duties.
“There is a parent company in South Korea, which has a supplier in Vietnam. We place an order with the parent company, which then places an order with the plant in Vietnam. Through first sale, we can actually go back to the cost in the factory [and] take out the parent company’s overhead when determining an entered value,” he explained. “It’s a very complicated process; you have to set it up very carefully. It’s time consuming and there’s a lot of work, but there is definitely value to capture depending on your product.”
But as with 9802 exemptions, taking advantage of the First Sale rule requires adherence to specific rules and the submission of specific documents, so consulting a professional is critical.
There are many duty drawback programs allowing for a refund on tariffs. If a shipper is re-exporting a product imported into the US, it can be eligible for a duty drawback if the item is in the same condition.
There are also manufacturing duty drawbacks.
“[If] I bring in widget[s] into the US from China, those widgets go into my factory, and I make something like a lawnmower, then I re-export the lawnmower to Germany, the Section 301 duty I paid on the widgets is now eligible for a duty drawback,” McKenny said. “I see shippers every week that are eligible for this drawback that have no idea. They are leaving money [rebates] on the table.”
CBP will review an application for a manufacturing duty drawback program, investigate the supply chain, ask detailed questions, and review documents before determining whether to approve the request.
“It’s a complicated program, there are regulations around this and you have to get your ducks in a row,” said Virginia Thompson, vice president of product management with Integration Point and former senior director of import and export with Crate & Barrel. “You need to determine the return on investment to figure how much it will cost to maintain the program and how much money you will get back because you have to be very sure you are doing it right.”
One thing a shipper can’t do to avoid tariffs is trucking Chinese goods to another country and then exporting them to the US. The fees apply to the country of origin, not the country of shipment.
It’s also illegal to transship cargo in an attempt to disguise the country of origin. For example, a shipper cannot send an item from China to Mexico, then put it on a truck and claim the item was made in Mexico. This violates Title 19, Section 1592 of the US Code and brings potential penalties ranging from fines to prison time.
In 2013, Hung Yi Lin was sentenced to three years in federal prison for transporting hundreds of ocean containers of Chinese-made honey to Chicago by falsely declaring the shipments contained sugar, syrup, and apple juice concentrate to avoid $39.2 million in anti-dumping duties.
With CBP on the lookout for any attempt to disguise the country of origin or the items in a container, such attempts are more than likely to end badly for the shipper.