For the last several years, manufacturers have had to address a litany of business challenges. While many of those challenges remain in 2022, there are two significant trade issues that deserve increased attention this year — tariffs and forced labor.
Several recent and upcoming trade actions mean importers must pay additional tariffs for imported components, raw materials, and equipment. Additionally, Congress and the Biden administration have shown a renewed focus on the prohibition of importing products and their components made with forced labor. Manufacturers who may not view themselves as importers but, in fact, are sourcing globally need to increase visibility into their supply chains and plan for potential detentions by U.S. Customs and Border Protection (Customs) and the attendant increased costs.
This article will examine those costs and what importers can do to mitigate their duty exposure.
Additional Tariff Burden
Manufacturers planning for 2022 should keep in mind that numerous components, raw materials, and equipment carry additional tariffs when imported into the U.S. Imported products have general duty ranging from free to 32 percent. General duty is based on duty rate and the value of the imported merchandise. In addition, the Trump administration imposed supplemental tariffs, either 25 percent or 7.5 percent, on over $350 billion worth of goods imported from China.
To date, the Biden administration has kept those duties in place. Specific products were subject to exclusions from those tariffs, but all exclusions, except for certain Personal Protective Equipment, expired Dec. 31, 2020. The Biden administration may be reinstating some of those exclusions. The U.S. Trade Representative should make its announcement on this issue in Q1 2022.
The bottom line is that before importing merchandise from China, manufacturers should confirm whether the product carries additional duty given that 25 percent is fairly onerous.
Steel, aluminum, and certain derivative products from most countries, with limited exceptions including Canada and Mexico, also carry additional 25 percent and 10 percent duties on top of the general rate of duty.
Manufacturers planning for 2022 should keep in mind that numerous components, raw materials, and equipment carry additional tariffs when imported into the U.S.
These duties were imposed by the Trump administration and kept in place by the Biden administration. The one exception is the recently negotiated change with the EU whereby a tariff rate quota system went into effect Jan. 1, 2022. The quotas are organized by product type and country of origin. Once the quotas are filled, importers will be subject to the tariffs until the next year.
Steel and aluminum are also subject to numerous anti-dumping and countervailing duty orders, which can impose onerous duties well over 100 percent. Solar cells and modules have also been subject to AD/CVD orders and to significant additional tariffs since 2018 that continue under the current administration.
To mitigate the burden of the general duties and the supplemental tariffs, importers should consider the options they have under current U.S. law to mitigate the increased duty burden. If companies are not already doing so, now is the time to think long-term about creating supply-chain efficiencies. Below is a list of possibilities for supply chain triage:
• First Sale: Customs duties are normally assessed on the sale between the importer and the middleman vendor; however, under “first sale” importers can use the lower factory-to-middleman price for valuation at entry into the U.S. The validity of first sale is well established and supported by years of case law, which sets out the requirements.
First sale can usually be used even if the vendor is related to the importer and/or the factory, so long as purchase orders are negotiated at “arm’s length.”
First sale has been used for years in industries with high duty rates, such as textiles and apparel. But as duties have gone up on a variety of products, industries are exploring the possibility of duty savings with first sale.
• Move Production: Moving all or part of production out of China may establish the country of origin as a third country, thus potentially avoiding the additional duties levied on Chinese products. Moving some or all of production is not simple or inexpensive but could be cost-effective in the long run.
Parts or components can still be sourced from China and then moved to another country for further processing and assembly. This legally changes the country of origin.
Under “first sale” importers can use the lower factory-to-middleman price for valuation at entry into the U.S
• Identify Deductions: Determine whether certain components of the value declared at entry can legally be deducted to lower duty liability. The dutiable value of imported merchandise is typically based on the transaction value of the goods entering the U.S. When merchandise enters the U.S. duty-free or with a low duty rate, some importers do not pay attention to the additions to the costs imbedded in the price of the imported merchandise. With proper structuring of the sale and record-keeping, some of the foreign fees that are elements of the price are valid deductions from the transaction value upon which duty payments are determined.
This may be an appropriate time for U.S. importers to look at their options under current laws to reduce increased duty liability.
While it has been a violation of U.S. law to import merchandise or its components made with forced labor since the 1930s, the issue of forced labor has come to the forefront in 2022. The U.S. government has specifically referenced the construction industry as using forced labor in Xinjiang, China, in production of its equipment.
In December, Congress voted unanimously to pass the Uyghur Forced Labor Prevention Act, and President Biden signed the bill into law. The act is the strongest legislation yet in response to forced labor in the supply chain of imported products, creating a “rebuttable presumption” that goods produced or manufactured in Xinjiang, or by certain entities, are made with forced labor and are prohibited from importation into the U.S. unless Customs determines with “clear and convincing evidence” that the products were not made with forced labor.
Customs and other government agencies have until late June 2022 to develop guidance for importers on acceptable due diligence and evidence to prove goods are not made with forced labor.
Sanctions may also now be imposed on any foreign person who knowingly engages in the forced labor of Uyghurs and other predominantly Muslim ethnic groups in Xinjiang, and any foreign person who knowingly engages in efforts to contravene U.S. law regarding the importation of forced labor goods from Xinjiang.
Customs and other government agencies have until late June 2022 to develop guidance for importers on acceptable due diligence and evidence to prove goods are not made with forced labor
Even before the Uyghur Forced Labor Prevention Act goes into effect, Customs has already significantly increased its enforcement against forced labor by issuing withhold release orders (WROs) and increasing the number of detentions of imported shipments. In 2021, Customs had 53 active WROs and in the last three months of 2021 detained 912 shipments on the possibility that certain products or inputs are made by forced labor. In June 2021 a WRO was issued for silica-based products made by Hoshine Silicon Industry Co., Ltd., in Xinjiang.
Some manufacturers do not view themselves as importers, but in fact their equipment and raw materials are sourced globally. Accordingly, manufacturers or companies purchasing components sourced globally must review supply chains and global operations and should tackle the issue of forced labor, review internal controls, and ensure all suppliers adhere to an effective code of conduct including provisions on forced labor and edit customer agreements to protect against late or missed delivery.
Importers can also prepare for the contingency that Customs will in fact determine that the importer has not proven that the goods were not made with forced labor and thus deny the merchandise entry into the U.S. Purchase agreements should account for the possibility that merchandise may be detained and who will bear the burden of the added detention costs.
If the importer decides to submit documentation to Customs to support the shipment, the importer is responsible for the warehouse fees, which will add up. Customs has been taking up to four or five months to review and make its determination. The required documentation is intensive and will take effort and resources to prepare a submission that may or may not secure a release of the detained goods. Customs does not release statistics on successful submissions.
As 2022 begins, manufacturers should keep in mind these top two trade concerns — the additional costs of increased tariffs and the enforcement of the prohibition of importing products and components made with forced labor — to increase the likelihood of smooth delivery of equipment, raw materials, and components with efficient costing.