How To Navigate The Trade War
By Eric Smith
Companies that are subject to new tariffs on Chinese-made products might be able to mitigate some or all of the financial impact, according to David Cohen, a Washington, DC-based international trade lawyer for Sandler, Travis & Rosenberg P.A.
“You’re not sitting ducks,” Cohen said during a keynote speech at the recent Sports & Fitness Industry Association Industry Leaders Summit in Denver, CO. “There are ways, there are countermeasures, that companies can take.”
Before delving into those countermeasures, however, Cohen’s outlined for attendees the increasingly complex global trade landscape and chronicled the economically tumultuous path the Trump administration is now leading the country down.
In “The Taxing World Of Tariffs—How Trade Policy Is Affecting The Sporting Goods Industry,” the final keynote of the sixth annual SFIA Industry Leaders Summit, Cohen showed an editorial cartoon depicting Trump shooting an arrow, which signaled his start of the global trade war.
Here are the global trade moves Trump has made—the proverbial arrows—since taking office in January 2017:
- Withdrew from the Trans Pacific Partnership.
- Abandoned the border adjustment tax
- Implemented Section 201 safeguards (solar panels and residential washing machines)
- Implemented Section 232 tariffs (steel and aluminum tariffs)
- Proposed Section 232 tariffs (autos, auto parts and uranium)
- Implemented Section 301 tariffs (certain consumer electronics, certain chemical inputs and certain health and safety products)
- Renegotiated NAFTA
But in the next panel of the editorial cartoon, Trump and a very worried-looking Uncle Sam are about to be bombarded by return fire, a dozen arrows pointed in their direction. This, Cohen said, highlights the retaliatory tariffs that have been wreaking havoc on U.S. businesses, including those in the sporting goods and outdoor industries.
“Countries don’t stand still. We don’t live in a bubble. We live in an interdependent economy and with many of these countries, and it’s alarming to see that they’re issuing these duties against us,” Cohen said. “They’re doing it, of course, in retaliation. But countries like Canada and Mexico and the EU, it makes no sense. These are our closest allies for generations.”
The Trump administration has enacted three tranches of tariffs since July, and one more could be coming, Cohen said. The first one, from July 6, totaled $34 billion. The second, from August 23, totaled $16 billion. And the third, from September 24, totaled $200 billion. A fourth list of goods totaling $267 billion could be coming later.
Cohen noted a disturbing pattern with the tariff tranches. In the first list, there were originally 1,300 products subject to tariffs, while 40 percent of them were removed. In the second, there were 284 products subject to tariffs, but only 2 percent of them were removed. And in the third, there were 6,000-plus products subject to tariffs, but less than 5 percent were removed.
“They’re including more product, they’re reviewing it more harshly and they’re assessing tariffs on more products,” Cohen said, meaning that fourth list could be even more devastating.
While some might argue that additional tariffs do financially benefit some industries and companies, especially those that produce exclusively in the U.S., one must look at the broader picture and how an atmosphere of stymying international trade has a ripple effect, much like a rock tossed into a pond.
“We are an integrated global economy,” Cohen said. “That train left the station decades ago. To raise costs artificially that will be necessarily be passed on, in some form or another, to either businesses or people, has negative consequences.”
U.S. companies that rely on imports from China as well as those that sell to countries which have implemented retaliatory tariffs are, of course, doing what they can to cope with the tariffs. But this mostly involves contraction. To absorb added costs, companies are buying less product, cutting headcount and scaling back on R&D.
It doesn’t take much more than a basic understanding of economics to understand where this will lead, Cohen said.
“U.S. businesses are becoming increasingly less competitive in this high-tariff environment,” he said. “Imagine if you’re sending product to China and now subject to these tariffs, your products have become less competitive. In the manufacturing world, if you’re bringing in inputs to the U.S., producing product and sending it out globally to China, you’re likely being taxed by the Chinese.”
But there are some ways to mitigate the tariffs, and Cohen closed his speech with eight possible strategies for companies to consider.
1) ABC—Anywhere But China: A company would need to perform a cost-benefit analysis first, of course, but it might be financially feasible to source elsewhere, like Vietnam, Malaysia or Indonesia, and avoid the tariffs. Some companies that manufacture in China are building plants elsewhere in Asia to evade tariffs. “It’s an inquiry that companies are making now,” Cohen said. “If you can get away from China, that’s great.” If you have to stay, what can you do with your supplier?” Some U.S. companies are asking their Chinese vendors to “share the pain” by splitting the tariff bill.
2) Product-specific exclusion requests: This is not yet available for List 3 tariffs, but companies have benefited from products that were eventually excluded from new tariffs. There are hundreds or even thousands of products that might be excluded from the additional tariffs, as many were on the first two lists.
3) Classification: Inquire to see if some of the products you’re importing from China could be reclassified in the Harmonized Tariff Schedule and would therefore not be subject to tariffs. “If you are importing product that was duty free for years, you might not focus your energy on whether your product was properly classified under the tariff schedule,” Cohen said. “It’s really important to inquire now if you’re subject to 25 percent. You can escape the tariffs if you can get your product properly classified and it’s not under the umbrella of the Section 301 tariffs. That’s an important opportunity for a lot of companies.”
4) Tariff/Origin Engineering: Can you legitimately move some of the production process, if not all of it, to another country? If so, you might be able to avoid some or all of the tariffs your products are subject to. “If you’re making a product and you can do certain steps in another country and can confer origin on that separate country, you’ve escaped the tariffs altogether because it only applies to Chinese-origin products,” Cohen said.
5) First Sale Valuation: This isn’t an avoidance of tariff but a reduction. Valuation is based on the first sale, so products that are sold numerous times in the supply chain—manufacturer to master distributor to distributor, etc.—could see a reduced tariff if the product’s price as it was when it came out of China is significantly lower than the final price. You’ll still pay the tariff, but it will be based on the lower cost of the initial sale.
6) FTZ/Bonded Warehouse: This is a tariff delay, not an evasion, and it depends heavily on sourcing and supply chain linkage, Cohen said. But foreign trade zones or bonded warehouses are fictitious areas within the U.S. that are beyond the reach of the duties for customs purposes until they’re withdrawn. Many companies use the U.S. for distribution, so a company can bring product in, store it in one of these facilities and ship it out without paying tariffs. There’s expense to set it up and house it, but it is something that companies are exploring.
7) Duty Drawback: This refers to the refund of duties if a company paid a tariff on a product but then exported it. A company can bring product in, pay the 25 percent duty, but then make claim for a refund if it’s exported. The U.S. will refund 99 percent of the duties paid, including for Section 301 duties.
8) 321 De Minimis: This exemption rule allows for goods valued at $800 or less to enter duty-free into the U.S. “Think e-commerce,” Cohen said. For a company that can pick and pack from Asia and ship direct to consumer in the U.S., if the product is valued at $800 or less they can avoid the tariff. “That’s a lot of setup and infrastructure to support it, but it’s something companies are starting to explore,” Cohen said.