Important US Customs Ruling on Determining Country of Origin for Section 301 Purposes

Dear Friends,

U.S. Customs and Border Protection recently published a ruling that every company considering shifting production from China to Mexico (or Canada) as part of a strategy to mitigate the impact of the Section 301 duties should be aware of.  In Headquarters Ruling H300226, CBP concluded that, while the NAFTA Marking Rules (19 C.F.R. Part 102) are used to determine the country of origin of articles imported into the United States from Mexico for marking purposes, the traditional substantial transformation test is used to determine the country of origin of articles for Section 301 duty purposes.  A copy of the ruling is attached here for your reference: H300226.

As you will see from the ruling, parts of a motor were imported into Mexico for assembly.  The assembly operation in Mexico was sufficient to satisfy the applicable NAFTA Marking Rule, such that the finished article was considered to a “product of Mexico” for marking purposes.  CBP, however, then went on to say that the traditional substantial transformation test is used for purposes of “antidumping, countervailing, or other safeguard measures[.]”  CBP then applied the traditional substantial transformation test to the facts and concluded that the Mexican assembly operations were not sufficient to confer origin and, therefore, the finished motor imported into the United States was a “product of China” for Section 301 purposes.  So, in short, the product had to be marked to indicate that it was of Mexican origin, but the importer had to pay the Section 301 duty applicable to Chinese-origin articles.

This ruling highlights a few important points.  First, while the traditional substantial transformation test and the NAFTA Marking Rules are meant to embody the same origin principles, they do not always produce the same result due to the different nature of the tests (i.e., the traditional substantial transformation test is subjective; whereas the NAFTA Marking Rules are objective).  Second, for purposes of section 301, the traditional substantial transformation test must be used even if the goods are imported from an FTA-partner country (e.g., Mexico, Canada, Singapore, etc.).  The NAFTA Marking Rules may be helpful to that analysis, but are not determinative.  Finally, CBP is willing to live with this seemingly absurd result (i.e., an article marked “Product of Mexico” being subject to duties applicable to “products of China”).

I hope that this helps.  If you have any questions about these issues, please let us know.

Best regards,
Ted

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NAFTA is Dead, Long Live the USMCA!

Dear Friends,

As you have undoubtedly seen by now, last night, an agreement was reached on a revised trade agreement that will replace NAFTA.  The new agreement will be called the United States-Mexico-Canada Agreement (“USMCA”).  The USMCA contains new provisions that were not in NAFTA (e.g., digital trade, data storage location requirements, etc.) and changes to others (e.g., agriculture, financial services, de minimis, certain rules of origin, such as autos, investor protections, trade remedies, etc.).  There are also side letters on how products of Canada and of Mexico will be treated, if the United States proceeds to impose additional duties on autos and auto parts (or other products) under Section 232.  There is a great deal in the revised agreement and all companies with meaningful NAFTA (or now, USMC) activity should be reviewing the proposed text to determine how it impacts their operations.  The text of the agreement is available here.

That said, the agreement has a long way to go before it comes into effect.  

As indicated below, the unofficial deadline to get a deal done was last night.  The deadline was based on the fact that President Pena Nieto leaves office December 1st.  Under U.S. law, President Trump has to publish the text of any agreement 60 days before signing.  Therefore, if the goal was to have the agreement signed before President Nieto leaves office, the text had to be published by September 30th.

Signing the agreement, however, is not the end of the process.  The agreement must be ratified by each of the three countries.  In the United States, that process (which includes a study by the U.S. International Trade Commission on the potential economic impact and consideration by both the House and Senate) will take meaningful time (i.e., months).  As a result, USMCA implementing legislation will not be considered until well after the first of the year. 

In addition, given the mid-term elections in a few weeks and the resulting uncertainty over the composition of the next Congress, it is not clear whether the agreement will have the votes necessary for passage.

It should be an interesting next few months.  Again, our recommendation is that all companies with meaningful cross-border activity with Canada and/or Mexico review the text and start planning for the alternatives (i.e., a new USMCA, an old NAFTA, or possibly no agreement at all).

If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,
Ted

Section 301 – China Responds

Dear Friends,

As expected, China announced yesterday that it will implement retaliatory tariffs of either 10% or 5% on $60 billion worth of U.S. products imported into China beginning September 24, 2018.  China’s action is in response to the U.S. announcement of its intention to implement the Section 301 List 3 tariffs.

The latest round of Chinese retaliatory tariffs will apply to products of U.S. origin that fall on four lists that China published on August 3, 2018.  China organized these four lists according to proposed tariff rates of 25%, 20%, 10% and 5%.  Based on its latest announcement, while the products have not changed, the tariff rates have.  China will impose a 10% retaliatory tariff on U.S. products on the 25% and 20% lists, and it will impose a 5% tariff on products on the latter two lists.  Links to these four lists are provided for your reference below.  While the lists are in Chinese, the products can be identified by their tariff numbers. 

U.S. Products to be Subject to 10% Tariff:

U.S. Products to be Subject to 5% Tariff:

Unlike the United States, China does not offer a formal process for importers to request product exclusions from the tariffs, and affected companies must explore other options to mitigate the impact of the Chinese retaliatory tariffs on their businesses, such as advocacy, changes to their sourcing and manufacturing strategies, and other duty planning methods.

Our trade team in China routinely assists companies evaluate their options and implement mitigation strategies to address the tariffs.  If you have questions, or if you would like to explore possible options, you can either contact us or reach out to Jon Cowley (jon.cowley@bakermckenzie.com) or Frank Pan (frank.pan@bakermckenzie.com) directly.  

We hope this update is helpful.

Best regards,
Ted

Re: Section 301 — The U.S. Imposes Additional Duties on ~$200 Billion Worth of Chinese-Origin Imports

Further to the below, the USTR has now released the finalized List 3.  The USTR’s website provides as follows:

“The list contains 5,745 full or partial lines of the original 6,031 tariff lines that were on a proposed list of Chinese imports announced on July 10, 2018.  Changes to the proposed list were made after USTR and the interagency Section 301 Committee sought and received comments over a six-week period and testimony during a six-day public hearing in August.  USTR engaged in a thorough process to rigorously examine the comments and testimony and, as a result, determined to fully or partially remove 297 tariff lines from the original proposed list.  Included among the products removed from the proposed list are certain consumer electronics products such as smart watches and Bluetooth devices; certain chemical inputs for manufactured goods, textiles and agriculture; certain health and safety products such as bicycle helmets, and child safety furniture such as car seats and playpens.”

A copy of the complete list is attached here for your reference: Tariff List_09.17.18  It will also be published in the Federal Register later this week. 

Best regards,

Ted


Dear Friends,

President Trump announced today that the United States would be moving ahead to impose additional duties on a further $200 billion worth of Chinese-origin imports (referred to as ’List 3’).  According to the announcement, the additional duties will start at 10% and run through the end of the year.  If the matter has not been resolved satisfactorily by then, the rate will be increased to 25% on January 1, 2019.  The additional duties will become effective next Monday, September 24, 2018.  A copy of the Statement from the President is attached for your reference:

The additional duties will apply to Chinese-origin goods classified in the tariff subheadings included on the final list.  This list has not been published yet, but, given the effective date (a week from now), it is expected in the next day or two.  The Section 301 Committee has been considering the comments and testimony received on the list of 6,031 tariff subheadings originally proposed for List 3.  It is being reported that a relatively small number of tariff subheadings (a few hundred) are being removed from the final list as a result of this process.

Once the final List 3 is published, it is widely expected that China will retaliate by imposing additional duties on a list of U.S.-origin products worth approximately $60 billion.  It is also being reported that China may decline any invitation issued by the United States to begin negotiations until after the midterm elections and/or may engage other levers domestically to squeeze U.S. companies doing business in China.

If China does retaliate, the President’s statement says that the Administration “will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”  This would be List 4 and it would cover all of the remaining imports from China.

This is the latest (and undoubtedly not the last) salvo in the on-going trade war between the United States and China.  Unfortunately, it is hard to view this salvo as being effective.  Rather than force the parties to the table, an additional 10% duty is arguably offset by the declining value of the yuan (which is down high single-digit percentages in a year) and is likely going to be viewed as a sign of wavering resolve from a president in a contentious midterm election year.  In short, today’s announcement will likely prolong the trade war, rather than help bring it to a speedy conclusion (which, in all fairness, may be the plan after all – if the war drags on long enough, companies will start to leave the war zone . . .).

We hope this is helpful.  If you have any questions about the Section 301 duties (or China’s retaliation), please let us know.

Best regards,

Ted

Section 301 — The U.S. Imposes Additional Duties on ~$200 Billion Worth of Chinese-Origin Imports

Dear Friends,

President Trump announced today that the United States would be moving ahead to impose additional duties on a further $200 billion worth of Chinese-origin imports (referred to as ’List 3’).  According to the announcement, the additional duties will start at 10% and run through the end of the year.  If the matter has not been resolved satisfactorily by then, the rate will be increased to 25% on January 1, 2019.  The additional duties will become effective next Monday, September 24, 2018.  A copy of the Statement from the President is attached for your reference: 

The additional duties will apply to Chinese-origin goods classified in the tariff subheadings included on the final list.  This list has not been published yet, but, given the effective date (a week from now), it is expected in the next day or two.  The Section 301 Committee has been considering the comments and testimony received on the list of 6,031 tariff subheadings originally proposed for List 3.  It is being reported that a relatively small number of tariff subheadings (a few hundred) are being removed from the final list as a result of this process.

Once the final List 3 is published, it is widely expected that China will retaliate by imposing additional duties on a list of U.S.-origin products worth approximately $60 billion.  It is also being reported that China may decline any invitation issued by the United States to begin negotiations until after the midterm elections and/or may engage other levers domestically to squeeze U.S. companies doing business in China.

If China does retaliate, the President’s statement says that the Administration “will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”  This would be List 4 and it would cover all of the remaining imports from China.

This is the latest (and undoubtedly not the last) salvo in the on-going trade war between the United States and China.  Unfortunately, it is hard to view this salvo as being effective.  Rather than force the parties to the table, an additional 10% duty is arguably offset by the declining value of the yuan (which is down high single-digit percentages in a year) and is likely going to be viewed as a sign of wavering resolve from a president in a contentious midterm election year.  In short, today’s announcement will likely prolong the trade war, rather than help bring it to a speedy conclusion (which, in all fairness, may be the plan after all – if the war drags on long enough, companies will start to leave the war zone . . .).

We hope this is helpful.  If you have any questions about the Section 301 duties (or China’s retaliation), please let us know.

Best regards,

Ted

Miscellaneous Tariff Bill – Signed into Law!

Dear Friends,

Further to the below, President Trump signed the Miscellaneous Tariff Bill Act of 2018 into law yesterday. 

All companies should review the list of products included in the MTB.  The provisions are not (supposed to be) company-specific.  Stated differently, any company that imports an article covered by a MTB description can claim the duty benefit (even if you were not the proponent of the provision). 

Also, keep in mind that the MTB only impacts the Column 1, General rates of duty for covered articles (i.e., the Most Favored Nation/Normal Trade Relations rates).  The MTB does not change or otherwise impact Section 232 or Section 301 duties; those still apply.

If you have any questions about the MTB, please let us know.

Best regards,
Ted


Dear Friends,

Further to the below, earlier this week, the House of Representatives took up the Miscellaneous Tariff Bill Act of 2018 (H.R. 4318) and passed the version approved by the Senate back in July.  The bill will now be sent to the President for signature.  It is being reported that the President is willing to sign it, but stay tuned for more details.

If enacted, the MTB could provide a needed boost to U.S. manufacturers (and others).

If you have any questions about the MTB, please let us know.

Best regards,
Ted

Miscellaneous Tariff Bill — Another Step Closer to Reality

Dear Friends,

Further to the below, earlier this week, the House of Representatives took up the Miscellaneous Tariff Bill Act of 2018 (H.R. 4318) and passed the version approved by the Senate back in July.  The bill will now be sent to the President for signature.  It is being reported that the President is willing to sign it, but stay tuned for more details.

If enacted, the MTB could provide a needed boost to U.S. manufacturers (and others).

If you have any questions about the MTB, please let us know.

Best regards,
Ted