Section 301 Update — Increase in US Duties (and Increased Pressure on China)

Earlier today, in between tweets about yesterday’s Kentucky Derby result and the Mueller report, President Trump announced that (i) the 10% duty on articles included on List 3 would increase from 10% to 25% this coming Friday (May 10, 2019), and (ii) a 25% duty would be imposed on the remaining $325 billion worth of imports from China “shortly”. 

 This announcement is a bombshell, particularly given recent stories about all of the progress being made in the negotiations between the United States and China.  Secretary Mnuchin and USTR Lighthizer were in China last week, and Vice Premier Liu was expected to come to Washington, DC this week, to continue (and potentially complete) those negotiations.  We believe that today’s announcement should be viewed in that context – i.e., the negotiations may be down to the final stages and President Trump is using the leverage he has to cinch the deal.  In particular, people should watch to see if Vice Premier Liu still comes to Washington, DC this week for talks, or whether he stays home in response to today’s tweets.  If he does come to town, then there is a greater likelihood that a deal is reached (and the proposed increase in duties may mooted or delayed); whereas, if he stays home, then the proposed increase in duties take effect.

 Unfortunately, President Trump believes that the Section 301 duties are “mostly borne by China” and “have had little impact on product cost”.  As a result, all companies that import articles from China (whether currently subject to the Section 301 duties or not) should be watching the news this week for further developments.  Interesting times.

 If you have any questions, please let us know.

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Further Flare Up in US-EU Trade War

Further to our earlier post, and as expected, the European Commission released today a preliminary list of U.S.-origin products that it is considering subjecting to additional duties upon importation into the European Union as a result of the dispute with the United States over aircraft subsidies (copy attached – tradoc_157861 (1)).  The EC has requested authorization from the WTO to adopt countermeasures (e.g., duties) worth up to $12 billion.  This WTO has appointed an arbitrator to determine the appropriate level for the countermeasures and it will be sometime before a final decision is reached.  In the meantime, the EC published this preliminary list.  It advised that it is considering imposing additional customs duties of up to 100% on products covered by the final list and that, it is accepting public comments through May 31, 2019.  The list includes food items (e.g., fish, fruits, juices, ketchup, sauces, wines, spirits, etc.), coal, chemicals, medical supplies, polymers and plastics, handbags, briefcases, suitcases, construction equipment, tractors, parts for motorcycles and for bicycles, games, etc. 

 All companies that trade with the EU should review the attached list and consider their options (including working with affiliates or customers in the EU to file comments on the proposed list). 

 We have a great deal of experience working through these issues, both here in the United States and in the EU, and would be happy to answer any questions or otherwise help you worth through this. 

 We hope this is helpful.

 

Flare Up in US-EU Trade War

Yesterday, the U.S. Trade Representative stoked the fires of simmering trade dispute between the United States and the European Union.  Specifically, the USTR published a preliminary list of EU products that will be subject to additional duties upon importation into the United States as a result of a dispute over aircraft subsidies (the underlying dispute has been the subject of WTO litigation for many years).

 The United States has requested permission to impose countermeasures (i.e., additional duties) against EU products worth $11.2 billion a year.  The list includes aircraft and aircraft parts imported from France, Germany, Spain and/or the United Kingdom, as well as many other unrelated articles imported from any EU country (e.g., certain fish, cheeses, olive oils, wines, textiles, apparel, ceramics, metals, tools, motorcycles, lenses, oscilloscopes, etc.).  The WTO is considering the appropriate amount of the retaliation and a final list will be published once that is done.  In the meantime, interested parties may file comments with the USTR on what articles should be on the list.

 The EU has also brought a case at the WTO regarding U.S.-subsidies for domestic aircraft production.  In response to yesterday’s announcement that the United States was moving forward, the EU has said that it will also seek permission from the WTO to impose retaliatory duties on U.S.-origin products under its case.

 All companies that trade with the EU should review the attached list and consider its options.  These duties are in addition to the duties the United States currently imposes on steel and aluminum, and is threatening to impose on automobiles and auto parts, from the EU under Section 232.  The EU has imposed its own additional duties on U.S. products and is threatening to add to that here.   

 We hope this is helpful.  If you have any questions about these issues (including how to cope), please let us know.

 

Possible U.S.-Mexico Border Shut Down (Update)

Earlier today, President Trump further clarified his position on closing the border. 

 In response to questions from reporters at an unrelated event (the Opportunity and Revitalization Council Meeting), President Trump said that he has two issues with Mexico:  (1) failing to stop migrants transiting Mexico to the United States; and (2) failing to stop the flow of illegal drugs to the United States.  He said that he intends to put Mexico on notice and give it some time to address both issues – one year.  If these issues are not addressed within the year, then President Trump said that he would impose additional duties on automobiles imported into the United States from Mexico (he indicated that he may also impose tariffs on other products, but that cars are “the whole ballgame”).  If tariffs do not work, then he will close the border.  President Trump said that he views these issues (i.e., stopping the flow of people and drugs from Mexico to the United States) to be more important than passage of the USMCA. 

 So, it appears that the threat to close the border is (most likely) off the table for the time being.  That said, the Department of Homeland Security is still re-assigning CBP agents to help deal with the increase in the number of migrants seeking to enter the United States (750 so far, but could be up to 2,000 agents).  Since there are fewer agents to handle cargo clearance, it is leading to increasing delays at many of the land border crossings.  We expect this trend to continue, and likely to get worse, in the short term.

 We hope that this is helpful.  If you have any questions about this situation, or what you can do (or should be doing) to cope, please let us know.

 

Possible U.S.-Mexico Border Shut Down

As you have likely heard by now, President Trump has threatened to close the U.S.-Mexico border to all cross-border traffic (individuals and commercial) this week if Mexico does not do more to stem the tide of illegal immigration to the United States.  While such a shutdown would be devastating to many companies, it would not be unprecedented (Presidents Bush and Reagan each closed the border temporarily during their presidencies). 

 What we know so far is that U.S. Customs and Border Protection is reassigning at least 750 personnel to help with border security (which means that fewer folks are available to carry out cargo exams, etc.).  Also, the President of Mexico said some encouraging things about regulating migration through his country, so, as long as President Trump feels that progress is being made, he may not actually close the border.  Of course, if he feels that enough progress is not being made, we expect that he will do it.

 Accordingly, it is important that all companies that rely on cross-border trade (develop and) implement contingency plans to deal with this possibility.  If you have any questions about types of contingencies that are available, or if you would otherwise like to discuss these issues further, please let us know.

Section 301 Update

Just a quick update on the evolving Section 301 situation.

 First, negotiations for a deal are continuing (and appear to be making meaningful progress).  U.S. trade officials were in Beijing this week, and Chinese officials will be coming to Washington, DC next week, to continue the negotiations.  By all accounts, progress is being made on the terms of a deal, but certain key issues remain unresolved.  If progress continues to be made (which, while not guaranteed, we expect given both sides’ strong desire for a deal), there will likely be a summit/signing ceremony sometime late April-June. 

 One of the things to keep an eye on as the talks progress is whether the deal will result in either side rolling back the duties already imposed (e.g., the List 1, 2 and 3 duties in the United States).  Last week, President Trump said that, even if a deal is reached, he intended to keep the duties in place “for a substantial period of time” until he is sure that China is complying with the terms (remember, we do not always take what he says literally, but we do take it seriously).  If the United States takes this approach, we expect that China will keep its retaliatory duties in place as well (the U.S. has imposed additional tariffs on $250 billion worth of Chinese-origin goods and China has imposed retaliatory duties on $110 billion worth of U.S.-origin goods).

 Second, the U.S. Trade Representative’s office recently released a second tranche of product exclusion approvals for List 1.   These exclusions include numerous products in Chapter 84, 85 and 90, including various types of housings, filters, rotors, valves, engines & motors.  There are also exclusions for certain high tech products (ADP storage units, digital displays, LED displays), and consumer products (instrument tuners, breast pumps, salad spinners).  Since the approvals are product-specific (not company-specific), all companies which import merchandise subject to Section 301 duties should be reviewing the approvals to see if they can benefit.  Remember, the approvals are retroactive (e.g., back to July 6, 2018 for List 1 articles).

Third, the U.S. Trade Representative’s office has not created a product exclusion process for List 3 by March 17th, despite the clear instruction from Congress in the Explanatory Statement to the Consolidated Appropriations Act, 2019 (H.J. Res. 31) (see previous post).  It appears that the USTR is sticking to its position that the exclusion process will only be created if the List 3 duty rate goes from 10% to 25%.

Finally, one of the ‘hidden’ (or maybe lingering) costs of the trade way will be the increased bond costs many importers are bearing as a result of the increased duties.  Even if a deal is reached (and even if duties are eventually rolled back), we do not believe that bond amounts will be lowered very quickly (if at all).  As a result, importers will likely be bearing this additional cost well into the future.

We hope this is helpful.  If you have any questions, please let us know.

 

Year-End Transfer Price Adjustments – Don’t Forget the Customs Valuation Implications

Just a quick reminder for those of you working at multinational companies which operate on a calendar year basis – do not forget to ask your tax colleagues whether any retroactive transfer pricing adjustments were made at, or before, year-end (assuming that they do not send this information to you on their own).  This is particularly important this year in light of the significant, unexpected cost increases many companies faced in 2018 as a result of the Trump Administration’s trade policies.  For example, the Section 232 duties imposed on steel and aluminum imports, and the Section 301 duties on imports of Chinese-origin goods, were not foreseen when the transfer prices were set in late 2017.  As a result, the additional duty expense these actions represent may have skewed a company’s results for the year, thereby making it more likely that a retroactive transfer price adjustment was needed in order to maintain the arm’s length nature of the transactions.

 If such adjustments were made (whether upward or downward), please be sure to consider the customs valuation implications here.  The failure to declare upward transfer pricing adjustments is a very common enforcement issue in many jurisdictions (largely because the issue is so easy to identify and often involves significant amounts/penalties); whereas downward adjustments could lead to a refund of customs duties, taxes and fees in some jurisdictions (including the US, Canada, etc.).  A quick note to your tax colleagues now could save a potential headache down the line, or put some money back in the company’s pocket. 

 We regularly assist clients with (i) the internal discussions with tax to identify whether any adjustments or other additions to value exist, and (ii) reporting any relevant adjustments/additions to value to Customs Authorities where needed.  If you would like any assistance with these issues, please let us know.