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How the working capital conversation is evolving

US businesses are finding themselves hit by higher costs as applications for exemptions from tariffs on Chinese imports are increasingly being denied, new research shows.

Despite the positive noises from Beijing and Washington following the signing of a phase one trade deal in January, pressure group Tariffs Hurt the Heartland has calculated that nearly US$12bn of imports from China in December will remain subject to extra 25% tariffs. The group, a coalition of trade associations and agriculture commodity groups, adds that an additional US$8bn in imports from China in December will face extra 7.5% tariffs after the phase one reduction.

“Tariffs are continuing to devastate American consumers, businesses and farmers,” says Jonathan Gold, spokesperson for Americans for Free Trade, a coalition of US businesses, trade organisations, and workers. Brian Kuehl, co-executive director of Farmers for Free Trade, adds: “Make no mistake – this trade war is as active as it was in December. With crippling tariffs on billions of products being shipped to and from China, the trade war is harming the American economy, devastating farmers, and causing a recession for US manufacturers. The phase one deal didn’t end this trade war – American farmers and businesses need real relief now.”

In the past, US businesses have been able to apply for relief in the form of tariff exemptions. Research by American Action Forum, a thinktank, shows that since the tariffs were enacted, businesses have filed over 150,000 requests for their imports to be excluded. As of November last year, the United States Trade Representative (USTR) granted approximately 35% of these requests – enabling companies to continue business as usual despite ongoing trade tensions.

This looks to be changing, however. Recent research carried out by the Wall Street Journal puts the current approval rate at just 3%, leaving companies struggling to find a way to avoid paying tariffs on Chinese-sourced inputs. “What that has meant in practice is that you are now seeing mostly denials,” says Richard Mojica, a lawyer at US firm Miller Chevalier.

A former attorney with the US Customs and Border Protection’s office of regulations and rulings, Mojica counsels US and international companies on how to minimise the cost of importing merchandise into the United States through strategic customs planning and duty-savings programmes. He also represents clients in litigation before the US Court of International Trade. He explains to GTR what options US companies have available to them to mitigate the cost of tariffs now that exemptions seem to be off the table.

 

GTR: Why have denials of tariff exemption applications spiked, particularly given the optimism following the phase one deal?

Mojica: This is the United States government unapologetically telling companies, ‘move out of China’.

Either they have to move out of China or pay the tariff. That has become a reality. The bigger companies that are more flexible have initiated plans to scale back from China in many different ways.

GTR: What reasons is the USTR giving for denying applications?

Mojica: One of the main grounds for denial by USTR is that a company did not demonstrate that its product can only be sourced from China. So, even if you said, ‘we source entirely from China and all of our competitors to the best of our knowledge source entirely from China’, unless you are able to somehow demonstrate without any doubt that the product is only available from China, in the current environment, you are going to get denied. When you are talking about apparel and to a certain extent electronics, it sets a very high bar.

GTR: What are US importers asking from you given this new environment?

Mojica: There two sides of the coin. One side is for companies to think proactively about what they can do to minimise the cost of importing merchandise into the United States. It is similar to tax planning in that regard. You think ahead, you plan, and there are a number of programmes that could help you reduce the amount of money that you pay which then results in lower landed costs.

The other side of that is the customs defence. We help companies defend against penalties and file voluntary self-disclosures and assist with litigation.

In connection with the tariffs, one thing that any trade lawyer will tell you is that the past couple of years have been the busiest times of our career.

GTR: What kind of companies are you getting enquiries from?

Mojica: Interestingly, there is a lot coming in from both big and small companies. We have the normal flow from the big companies, but those big companies tend to have more resources that they can throw at tariff mitigation internally.

We have had an uptick in smaller companies; they made the decision to source from China a long time ago, and everything was going smoothly, they had that stable labour force over there – and then their world has been rocked. Now, this is sometimes the first time that they hire legal counsel and certainly the first time that they hire trade counsel, so we are helping them navigate the tariff mitigation process.

GTR: Many companies don’t have the flexibility to move out of China. What can they do?

Mojica: At this point, the options are fewer and fewer. Several months ago, I would advise clients, ultimately, whether you are covered by the tariff depends on the tariff classification and the country of origin of your goods. Your products must be country of origin China, and that requires a certain legal analysis, so it is not a given. Just because it is assembled in China does not mean that it is country of origin China, for example. And it must be classified in a certain tariff classification code; that is not also a given. Just because you have been classifying it in one way doesn’t mean that it is properly classified. We may be able to argue and win at customs that the product is classified in another provision that is not subject to tariffs.

GTR: Is it still possible to mitigate tariffs based on goods classification and country of origin?

Mojica: Today, the country of origin analysis is very much still present. When it comes to manufactured goods, I am spending a lot of time counselling companies in order for their product not to be country of origin China. In apparel, for example, if you take the production up to a certain point in China and finish it in Vietnam, it is going to be a country origin Vietnam good. This tends to work more with the larger companies that are doing production in multiple countries.

Tariff classification has become less of an issue, because most products are now subject to tariffs. There is a sliver of goods in list 4B that are having tariffs rolled back, through the results of the trade agreement, so that is worth exploring to see if your product is classified there.

GTR: What other options are there?

Mojica: There are other programmes that the more sophisticated companies are able to use. We see more and more companies enquiring about how to set up first sale programmes, in instances where you have multi-tier transactions. That is easier said than done. That is out of the reach of the small companies, because you need to have an intermediary.

A programme that has grown even for the small companies is duty drawback out of the US. The idea there is that if a company that pays tariffs on its imported goods exports a product that has the same eight-digit HTS code, it can recover 99% of the section 301 tariff that you paid, so on a one-to-one matching basis. You have to pay the duty when you import into the United States, but if you then go on to export them again, you get 99% back.

The idea is it has to be essentially the same good. To do this, you don’t have to have a massive import/export operation. We have clients that are small, but they still export to Canada, and they are able to recover drawback there. I know from experience that the drawback brokers are incredibly busy right now, because they have so much demand from companies trying to recover those section 301 duties.