By Adams Lee
With the United States and China both announcing yet another round of increased and new tariffs, we wanted to summarize what has happened in the earlier rounds of tariffs and highlight a few items and upcoming deadlines U.S. companies can do to address this latest round of tariffs.
|China Imports Covered||Hearing||Rate – Effective Date||Exclusion Requests|
|List 1 – $16 billion – industrial products: engines, motors, machinery, steel, aluminum, chemicals, glass, rubber, plastics||5/15-17/18||25% – 7/6/18||10/9/18|
|List 2 – $34 billion – industrial products: plastics, chemicals, ceramics, tractors, optical fibers||7/24-25/18||25% – 8/23/18||12/18/18|
|List 3 – $200 billion – industrial, consumer products: food (meat, seafood, fruits vegetables), furniture, batteries, leather goods||8/20-24, 27/18||10% – 9/24/18||TBA (due Oct/Nov 2019?)|
|List 4 – $300 billion – all remaining products, apparel, footwear, toys, electronics, home, sporting, consumer goods.||Starting 6/17/19||25% – TBA (mid July 2019?)||TBA (due Nov/Dec 2019?)|
US-China Tariff To-Do Items
List 4 – $300 billion – On May 13, 2019, the USTR (United States Trade Representative) announced another list of Chinese products to be hit with 25% tariffs. This list of 3,805 full and partial HTS subheadings covers essentially all remaining products from China that were not already covered by previously announced Section 301 tariffs. The products on this list, worth about $300 billion, include toys, apparel, footwear, manufactured textile, electronics, home goods, sporting goods, and other consumer goods. The only exclusions are for pharmaceuticals, certain pharmaceutical inputs, medical goods, rare earth metals, and critical minerals.
Like it did with the three prior lists of tariffed products, USTR will hold hearings and accept comments as to whether certain products should be exempted from the 25% tariff proposed for the List 4 products. The timeline for the List 4 products is as follows:
June 10, 2019 – deadline to file requests to appear at the USTR hearing for the proposed List 4 tariffs.
June 17, 2019 – deadline to submit written comments on the proposed tariffs, including whether certain specific subheadings should be excluded from the additional tariffs.
June 17, 2019 – Section 301 Committee will convene a public hearing at the main hearing room of the U.S. International Trade Commission (500 E Street SW, Washington, DC 20436) that will begin at 9:30 am. Like the hearings for the prior lists, the hearings may be held over several days.
The effective date of the List 4 tariffs has not yet been announced, so extremely unlikely, it is still possible the US and China will agree to a deal that would stop or at least postpone the imposition of the duties on these products. Based on the timing between the hearings/comments and the effective dates for the prior lists, assuming no deal is reached, it appears likely the tariffs for List 4 will be imposed in mid-July.
After the tariffs are officially imposed on the List 4 products, it is expected that a product exclusion request process will be started for these products, probably sometime in October 2019.
List 3 – $200 billion – The List 3 products ($200 billion) have had a 10% tariff effective since September 24, 2018. Unlike the first two lists of tariff products, USTR did not announce a product exclusion request process on these products because the List 3 tariffs were for only 10%. Now that a breakdown in US-China trade negotiations has resulted in the List 3 tariffs being increased from 10% to 25%, USTR has started up the List 3 exclusion request process. Though USTR has not officially announced the List 3 exclusion request due dates, USTR did issue a draft of the exclusion request forms that are subject to comments (due June 7, 2019).
The draft exclusion requests form for the List 3 products is similar to that used by USTR for the prior two lists of Chinese tariffs, but it also asks for additional and more detailed information than the prior two lists.
Exclusion requests are to cover only a single product, and must include the following information:
- the 10 digit subheading of the HTSUS applicable to the particular product requested for exclusion.
- the physical characteristics (e.g., dimensions, material composition, or other characteristics) of the product that distinguish it from other products within the covered 8-digit subheading.
- USTR will not consider requests that identify the product at issue in terms of the identity of the producer, importer, ultimate consumer, actual use or chief use, or trademarks or trade-names.
- USTR will not consider requests that identify the product using criteria that cannot be made available to the public.
- The product function, application, and principal use.
Unlike prior exclusion requests, USTR will ask submitting parties to provide more detailed sales and financial information, including the following:
- The company’s gross revenue for fiscal year 2018, first quarter 2018, and first quarter 2019.
- The percentage of the company’s 2018 total US gross sales from Chinese products.
- The quantity and value of the company’s purchases for 2017, 2018 and first quarter 2019, not only from products imported from China, but also for products from domestic and third-country suppliers.
- Identify whether the Chinese product is a final product or an input. If it is an input, companies will need to report the percentage of the total cost of the finished product that is accounted for by the imported Chinese input.
Exclusion requests also should address the following factors:
- Whether the particular product is available only from China. In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
- Whether additional duties on the particular product would cause severe economic harm to the requester or to other U.S. interests.
- Whether the particular product is strategically important or related to “Made in China 2025” or to any other Chinese industrial programs.
- Requesters may also provide any other information or data they consider relevant evaluating their tariff exclusion request.
The List 3 exclusion process will likely be announced around June 30, 2019 with the due dates for exclusion requests sometime in October- November 2019.
China’s Exclusion process for tariffs imposed on US goods imported to China
After the US announced that List 3 tariffs would increase from 10% to 25%, China announced an increase in tariffs on about $60 billion worth of U.S. goods imported into China, effective June 1, 2019.
The China tariffs on US products would increase:
- From 10% to 25% for 2,493 tariff lines;
- From 10% to 20% for 1,078 tariff lines;
- From 5% to 10% for 974 tariff lines;
- Remain at 5% for 595 tariff lines.
Quartz Magazine has published an English language list of the products subject to the 25% tariff here. Go here for the list in Chinese of 2,493 products facing a 25 percent tariff, here for the list of 1,078 products facing a 20 percent tariff, here for the list of 974 products facing a 10 percent tariff, and here for the list of 595 products whose tariffs will remain at 5 percent.
China also announced it would initiate an exclusion request process for companies that import, manufacture, or use the U.S. products subject to China’s retaliatory tariffs. U.S. companies should ask their Chinese customers to see if they would be willing to submit an exclusion request for their products. Some of American clients that sell their products into China via Chinese importers and/or Chinese distributers have done that and their Chinese importers/distributers have mostly responded by saying that they would do so, so long as the American company pays some or all of their attorneys’ fees and costs. Applicants for these exclusions are to submit their exclusion requests through the China Tariff Policy Research Center of the Ministry of Finance website. Each request must be limited to a single product and must identify the eight-digit tariff heading. Exclusion requests will be considered based on the difficulty to obtain the imported U.S. product from other sources (domestic, third-country), and also of any structural impact on the relevant Chinese industries.
The deadlines for submitting exclusion requests depends on the particular tariff line and the specific retaliation list. Exclusion requests for certain excluded products are to be submitted from June 3, 2019 to July 5, 2019 and exclusion requests for other of the products are to be submitted from September 2, 2019 to October 18, 2019.
One thing companies (be they Canadian, European, Australian, Japanese, Latin American, or from the United States) should NOT do is just assume that by “having their products made in a country other than China” will free them from US tariffs no Chinese goods. Because doing this might noto only keep them subject to the tariffs on Chinese goods, it can also subject these companies to financial penalties and even jail time.
I bring this up because the believe that shipping a Made in China product to Taiwan or to Vietnam or to Thailand or really to anywhere else in the world before then shipping it to the United States will somehow render that product to no longer be considered to have been made in China for US tariff purposes. If this is all you do we can guarantee your product will still be made in China and you will almost certainly be hit with the full force of the tariffs and with a lot more. And yet, all the time we hear from our own clients and we see on the internet that this fact is not widely understood. The fact that many Chinese factories encourage this sort of illicit transshipping by insisting that it is either “perfectly legal” or “will never be detected” obviously does not help.
In China Tariffs and What to do Now, Part 1, one of our China lawyers (as opposed to one of our international trade lawyer talked about this illegal transhipping of China products to hide their country of origin by starting out that post by making clear this is NOT something anyone should be doing:
Our China lawyers are getting a slew of phone calls and emails from companies that are looking at massive tariffs being imposed on their products imported into the United States. These companies want to know what they can and should do now to ameliorate or avoid their tariff problems. This is the first part in what will no doubt be a constantly ongoing series of posts on what you should be doing in light of the US tariffs being enacted against imports from China.
But before I discuss what companies do about their tariff problems, it is far more important I start out discussing what they should NOT do. They should not have their China products shipped to Taiwan or to Malaysia or to Thailand or Vietnam or anywhere else and then have those products shipped to the United States as though they are not from China. Doing this sort of transshipping can and does lead to massive fines and to JAIL TIME. I am not kidding. I am starting out with a post on what not to do because the risks from this one thing far exceed the benefits of the things we will be discussing in our subsequent posts.
And yet, many are telling us that their Chinese factories are suggesting these exact sort of transshipments and giving assurances that they are legal or that nobody ever gets caught, neither of which are remotely true. Step back for just a second and ask yourself why you are even considering taking legal advice about United States customs law from a Chinese factory owner or salesperson who has all the incentive in the world to sell you Chinese products and very little incentive to keep you out of jail. Please, please, please don’t fall for that. Please.
Chinese companies and the U.S. importers of their products often believe they can get around United States tariffs by transshipping the products to Malaysia, Vietnam, Philippines, Sri Lanka, Thailand, Bangladesh, India, [or some other country] before sending them on to the United States. Their plan is to relabel the products with a new country of origin and then export the products to the US free of China , without US Customs and Border Protection (“CBP”) ever being the wiser.
US Customs has become expert at discovering such evasions and the penalties when caught have become very harsh. Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 USC 1592 and to criminal prosecution under 18 USC 542 (import by using false statement) and 18 USC 545 (smuggling). Lying about a product’s country of origin can subject you to 20 years in Federal prison.
Immigration and Customs Enforcement (“ICE”) has conducted criminal investigations against a number of products, including honey, saccharin, citric acid, lined paper products, pasta, polyethylene bags, shrimp, catfish, crayfish, garlic, steel, magnesium, pencils, wooden bedroom furniture, wire clothing hangers, ball bearings and nails. Many of these investigations have led to criminal convictions and large fines and penalties. U.S. importers have also been prosecuted and sentenced to prison for bringing in Chinese products, such as honey, garlic, wooden bedroom furniture and wire clothing hangers, by means of false Country of Origin statements so as to evade US AD and CVD orders. My law firm’s international trade lawyers are always pointing out that whenever the US increases tariffs on a product, it knows there is an increased likelihood of illegal transshipping of that product and it prepares accordingly. There is zero doubt the U.S. government is preparing to catch those who transship China products to avoid the new China tariffs. There is also zero doubt that both the U.S. government (and even the U.S. populace as a whole) are going to be tougher than usual on anyone who engages in transshipping
United States CBP, ICE and the Justice Department can be very tough investigators and prosecutors.
One of the biggest hammers against illegal transshipping is the False Claims Act (“FCA”). The FCA ( 31 U.S.C. § 3729) allows people or companies to file what are called “qui tam” lawsuits against individuals or companies that directly or indirectly defraud the Federal government seeking triple damages on the government’s behalf. Anyone who knows of the fraud, including a competitor company may file a qui tam lawsuit. And they do.
Qui tam actions are brought to attack competitors and to get 15 to 30 percent of the triple damages the U.S. Government can recover from the lawsuit. Your competitors and your importers and your own employees (and even employees of the Chinese company that has assured you that your transshipping is perfectly legal) are the most likely to initiate a qui tam lawsuit against you, but sometimes it is just someone who learned of what you are doing. Because the person or company that brings such an action can be awarded millions and even tens of millions of dollars, the incentive to file is huge. If you want to get a better idea of just how lucrative these lawsuits can be, do a Google search for lawyers looking to take on qui tam lawsuits and look how much they are paying for qui tam keywords.
Qui tam lawsuits are filed confidentially and are not served on the defendants, but on the US Government. The US Government then determines whether to intervene and pursue the action or settle with the defendant(s). If the U.S. Government intervenes, it takes on primary responsibility for the case. If the U.S. Government decides not to intervene, the initial claimant may dismiss the lawsuit or pursue the lawsuit on its own.
What is your duty as the US buyer/importer to make sure the products you are importing are truly from the country listed on the import documents?
The examples below are illustrative.
- A US importer is told by its Chinese producer/exporter whose products will be covered by the China tariffs not to worry about the tariffs because the Chinese company will ship the product through Taiwan and list them as Taiwan products. The importer should decline this offer because if it imports this product knowing it is from China and not Taiwan, it will be criminally liable under U.S. customs law and subject to potentially massive damages under the U.S. False Claims Act.
- A US importer suspects its Vietnamese “producer” is not actually making anything, but rather simply transshipping product that comes from the Chinese company that owns it. The company visits the Vietnam facility and it does not appear anything is actually being produced there. The US importer raises this concern with the Chinese company which tells the US company that it can avoid any problems by being listed as the consignee of the products and not the importer of record since it is the importer who is at risk. This too is simply wrong information.
Transshipping your product to disguise its country of origin is a crime and Chinese companies and their US importers can have very different interests when it comes to importing product into the United States. The Chinese company wants to ship product to the US above all else and the US importer should above all else want to avoid Customs trouble and avoid liability and stay out of jail. The Trump Administration has made known its desire to vigorously hunt down and prosecute transshipment claims.
If you are doing business with a person or company using transshipments to minimize US customs duties, you could be in very big trouble and you should contact a lawyer immediately. If you are aware of such transshipments by a company with which you are not doing business, you should consider contacting a lawyer to determine whether you might profit from your information.
Here’s the thing though. There is often a lot you can do to legally change the country of origin of your products, but the key here is legally. The other key here is that the rules for figuring out the appropriate country of origin are incredibly complicated and best left to an experienced and qualified international trade lawyer, especially in light of all that is going on between China and the United States these days. Even our China lawyers do not claim to be qualified on this score and, for instance, about all I tell my clients who ask for country of origin help is something like the following:
About all I know is that putting together your electronics product in China and then shipping it to Vietnam for a plastic case to be put on it is not going to do the trick. Beyond this though, you are going to need to consult with our trade and customs lawyers because this is not something we can afford for you to get wrong.
So yes, it may be possible for you to make minor (or major) changes in how you are having your products made so they can legally avoid the China tariffs, but please, please, please tread carefully hear and whatever you do, don’t just go along with what your China factory is telling you to do. It’s your company and your money and your freedom that’s at stake here and this is not something on which you should be messing around and taking advice from anyone whose job it is to do anything but look out for your interests.
Then in Avoiding the New Tariffs on China Products: Watching the Substantial Transformation Sausage Get Made, we gave you an example (via an amalgamation of emails) of how our international trade lawyers seek to determine whether a product does or does not legally qualify as having been made in a country other than China under the U.S. tariff country of origin requirements.
It should come as no surprise that international trade lawyers all across the United States are having to put in late nights and weekends lately 1) explaining to clients President Trump’s 25% tariff on Chinese products, 2) helping them figure out whether their products are or are not on this tariff list, and 3) helping them figure out what their options are if their products are on this tariff list. I have been cc’ed on a ton of these emails in the last week and the below is an amalgamation of them, put forth here to help companies that import from China understand what at least some of the common issues are that they are and will be facing.
Like I said, the below is an amalgamation of a slew of emails, with any and all identifiers stricken. I have set them up as coming from HB INTERNATIONAL TRADE LAWYER (the HB is for Harris Bricken — my law firm) and our various clients are referred to as CLIENT.
CLIENT: I figured you would be the best people to consult for this. If the Trump tariffs do happen we would like to know what our legal options to combat/reduce this? Also, what if we suspect a competitor has been skirting the tariffs already? Can we report them effectively and anonymously?
HB CHINA LAWYER: I will turn you over to one of our international trade lawyers and you should get an email from one of them shortly. As you can imagine, they’ve been extremely busy since the trade war began and but I know they have dealt extensively with exactly the issues you raise (how to deal with the trade war legally and how to handle competitors who deal with it illegally). It is theoretically possible to make an anonymous complaint, but I’ll defer to our international trade law team on whether that’s advisable in your particular situation.
HB INTERNATIONAL TRADE LAWYER: It sounds like you are interested in learning more about (1) whether you can get a tariff exclusion/ exemption for your particular products; and, (2) whether you can report your competitors who may be illegally circumventing the tariffs by mis-declaring the country of origin or product description.
For #1, it would be helpful to get a list of the products for which you wish to seek a tariff exclusion. For each product, please provide a description of the product as listed on your invoices/website, and also identify the HTS (Harmonized Tariff Schedule) code used to identify the product for US imports. The tariffs identify which products are covered by the HTS#s.
For each product, are you aware of any US producers of this product? Any third country producers of this product?
What is the estimated total US consumption of this product for the past three years 2016-18 and for the next few years (2019-21).
For #2, trying to report the wrongdoings of others is challenging because of the difficulty in getting hard evidence that proves it. Though it is possible to build a case from circumstantial evidence, it would still be necessary to somehow demonstrate a factual basis for a claim that a Chinese product is being mis-declared as a different product or from a different country. We should discuss by telephone the kind of information you already have to see whether it would be worth trying to pursue this kind of action.
Let me know if there is a good time for us to talk.
CLIENT: The below answers your questions as best we can.
Product Information. Final assembly is done by a main factory based in ________, China. The product then gets shipped via containers to fulfillment centers around the world, including to three different U.S. states.
We get the following product from China:
Product One: ____________________
Other Producers. There are other much smaller producers but the entire supply chain for everybody is pretty much just in China.
Other country producers. Korea and Taiwan also produce this product, but only the ultra-high end and only in pretty insignificant quantities. We are hearing talk of Thailand and Vietnam and maybe Indonesia starting to produce as well, but we have yet to see this.
Estimated Consumption. Estimated yearly US consumption for 2016-2021:
What if we shipped the container to Vietnam and then swapped our product into another container. Will we still be liable for the tariffs? One of our factories is insisting this will “fix” the tariff problem but I find it hard to believe it can really be that simple. But what if we ship our product to a factory in Vietnam and they check each one to make sure they are in good order and then they tighten the screws on them, etc., and then load them onto a new container and ship them to the United States? Would this relieve us of having to pay the tariffs?
HB INTERNATIONAL TRADE LAWYER: Thanks. This is good information that we can use to figure out how best to make an exclusion request for your products. USTR should be announcing the schedule/process for the List 3 ($200 billion) products that are now facing a 25% tariff that should be similar to the exclusion process for the previous two tariff lists.
As to the last part about circumventing the tariff, these are clearly fraudulent actions that likely would trigger civil penalties and perhaps even criminal charges. Regardless of whether you swap containers in a third country or move your product to a factory in a third country to repackage/ relabel the goods, fundamentally the products still will have a China country of origin and these actions will not legitimately change that. If those goods are declared as having a Vietnam origin on a US customs entry declaration, that would be a materially false declaration that would subject anyone involved to potential monetary penalties under US Customs laws and possibly even criminal prosecution.
I think these are probably the likely scenarios that your competitors may be engaging in. To the extent you are able to get any solid information about other companies doing this kind of illegal transshipment, this could be used to bring a claim that would lead US Customs to go after these competitors.
It is possible to change the country of origin of the product to Vietnam, but to do so there has to be enough production/processing that occurs in Vietnam so as to constitute a “substantial transformation” of your product. You might be able to have certain parts produced in China, but other parts produced in Vietnam that are significant enough so that the product could then be considered to have been “made in Vietnam.” But if your product is simply assembled (e.g., screwdriver operation) of parts that were all made in China, that very likely would NOT be enough to make that product a Vietnam origin product. Substantial transformation is a highly fact-specific analysis that does not have a simple formula, but rather is done on a case-by-case basis.
To give you a better idea of what substantial transformation really entails, I urge you to read this blog post written by one of our customs lawyers back in 2015, entitled Made in China? You should also read this blog post, China Tariffs and What to do Now, Part 3, written by one of our international lawyers about six months ago. I suggest we then set up a time to talk.
How to Determine Country of Origin for Determining Whether a Product is Subject to the China Tariffs.
How exactly does the United States determine a product’s all-important country of origin when determining whether a product was made in China and thus subject to the China tariffs. Generally speaking, a product’s country of origin is the country in which the product was manufactured, produced or grown. If that product then goes to a third country before it gets shipped to the United States, that third country will be deemed to be that product’s country of origin only if enough work was done on that product and/or enough material was added to that product such that what happened in that third country had a “substantial transformation” on the product.
Generally for there to have been a substantial transformation of a product in a third country, that third country must have done enough to the product to have created a new and different good with a name, character, use, and tariff code different from its constituent materials and different from what it was before it or its materials reached the third country.
The United States employs a whole hosts of methods for determining a product’s country of origin and those methods can vary depending on the purpose for which the determination is being made. Therefore, it is crucial when trying to determine the country of origin of your products for China tariff purposes, you use the methods that actually apply to determining a product’s country of origin for China tariff purposes.
In determining whether a product has undergone a substantial transformation in a country other than China, the following four methods (singly or in combination) are commonly used:
- Substantial Transformation. A product’s country of origin is the country where it was sufficiently processed so as to become a new product with a new name, character or use. If you take a piece of timber from China and turn that into a children’s toy in Thailand, its country of origin will be Thailand. It gets more complicated from there.
- Percentage in Value Added. If you have a product that costs a total of $20 to make and $18 of that cost comes from processes and materials from one country, that one country will almost certainly be deemed to be that product’s country of origin. Again, it gets more complicated from there.
- Tariff Classification Change. If a product undergoes a change in tariff classification in a third country as per the Harmonized System of Tariff Nomenclature, the odds are good that third country will now be that product’s country of origin for China tariff purposes.
- Specified Processes. Certain production and sourcing processes may or may not determine country of origin. This test can be very relevant for certain products and completely irrelevant for others.
If you find this information on substantial transformation and country of origin complicated and difficult to understand, good. Since day one, the goal of this blog has been to try to explain the laws relevant to your business in terms non-lawyers can understand. We made this clear in our Mission Statement way back in January, 2006:
We will help you figure out how you can use the law as both a shield and a sword. We will give insights to achieve practical solutions, while doing our best to entertain. We know lawyers are not popular, and though we are ourselves quite likable, we recognize the need to avoid those things that incite lawyer hatred. We strive to avoid legal jargon and namby-pamby language that attempts to camouflage our views or to avoid controversy.
So why am I now happy for our readers not understanding what constitutes substantial transformation of a product or how to determine a product’s country of origin for China tariff purposes? Because these things are both risky and are truly something that can be understood only by international trade lawyers who regularly deal with US customs and their methods and rules and the case law that explains those things. Put simply, determining whether a product has been substantially transformed and determining a product’s country of origin for China tariff purposes is something that must be done on a case-by-case/product-by-product basis by international trade lawyers experienced in doing exactly that. I just don’t want anyone getting a big fine or going to jail because they wrongly believed their product was made in Vietnam when it was actually made in China.
Are you with me on all this? What are your thoughts?
Adams Lee of the Harris Bricken law firm has more than 20 years’ experience providing strategic advice and legal guidance on complex international trade and administrative regulatory matters to US and foreign companies, trade associations, and foreign governments. He advises companies in a broad range of industries on international trade remedy and trade policy issues.