January 29, 2019 Trump’s Trade War with China

Tariffs between the US and China create implications for manufacturers and the manufacturing process itself that are crucial to be aware of.

January 29, 2019

By Peter Quinter

President Trump declared he would “Make America Great Again” by declaring an international trade war against our number one trading partner, China – despite the countless products they provide to our country. The trade war truly began on July 6, 2018, when Trump instituted an extra 25 percent tariff on certain items imported from China and when China retaliated by instituting a 25 percent extra tariff on certain items imported from the United States.

Under Section 301 of the Trade Act of 1974, the President of the United States has the legal authority to impose additional tariffs on imported merchandise when there is an “emergency” situation. President Trump created such an emergency on March 22, 2018, known as the “Section 301 Report,” when the United States Trade Representative (USTR) concluded that China was stealing the intellectual property (patents, trademarks and copyrights) of U.S. companies as a result of doing business in China. A limited number of products were included in the list of Chinese products subject to the 25 percent additional tariff effective July 6, 2018. Displeased with its effect, Trump imposed a 10 percent tariff on numerous other products from China on August 23, 2018 – however, China still did not comply with Trump’s demands, and he instituted a final, very extensive list of Chinese products adopting an additional 10 percent tariff on September 24, 2018. All Chinese Products on List one, List two and List three were to increase to 25 percent effective January 1, 2019, but Trump has delayed the implementation of that increase to March 1, 2019 while negotiations continue.

Virtually every person and company in the United States has been or will be affected by the increase of tariffs on Chinese products. Nonetheless, someone must pay the extra 25 percent tariff collected by U.S. Customs and Border Protection (CBP) on the imported Chinese products. If the U.S. importer pays the 25 percent, it then charges its customer (the wholesaler) the 25 percent, and the wholesaler charges 25 percent more to the retailer. The result? You will pay 25 percent more at the department store, supermarket or for e-commerce purchases.

It is critical to know what is on the lists, as not all Chinese products are subject to the additional 10 percent or 25 percent tariffs. Through Harmonized Tariff Schedule of the United States (HTSUS) and general description, the USTR website identified what items are subject to the extra tariff, and whether is it 10 percent or 25 percent. Most U.S. importers anticipated the additional tariffs and negotiated new terms with their Chinese suppliers in an attempt to avoid passing on the full amount of Trump’s tariffs. The more favorable international currency exchange rate for the U.S. Dollar has helped too.

Some of the more sophisticated, larger U.S. importers have either explored sourcing their products – in whole or in part – from countries other than China; principally Vietnam, Indonesia, Malaysia, South Korea, Brazil and Mexico. Using a customs lawyer to determine if there was a “substantial transformation” of the components purchased in multiple countries to create a new and different article of commerce would allow some components to be purchased from China, but technically manufactured in another country which would result in avoiding Trump’s tariffs on Chinese products. Countless companies over the past several months consulted on this issue all have concluded that they cannot purchase or make the product in the U.S. at a price that is financially feasible with the quality demanded by the U.S. consumer. Heavy manufacturing, including steel and aluminum, will not return to the United States as it was in the 1950s and 1960s as Trump envisions.

Another option provided by an international trade attorney was to file an exclusion request with the USTR; or an on-line request by which the U.S. importer attempt to justify why its imported product from China is an outlier to Trump’s extra tariffs. The last opportunity to file the product exclusion requests was December 18, 2018 for List two. The USTR has not yet issued instructions for submitting an exclusion request form for the comprehensive List three, but such instructions are expected in February 2019. It is anticipated that the significant, persuasive factors remain whether the product is available from countries other than China, and whether Trump’s extra tariffs will create an extreme financial harm to the U.S. company.

CBP has been around for over 200 years to target and examine imported shipments. Attempting to avoid Trump’s tariffs is common and can be done legally through the above – exclusion requests and “substantial transformation” analyses. Evading Trump’s tariffs through improper claims is a common practice by U.S. importers. This may be done with or without knowledge of the U.S. importer who thinks he or she is buying from Malaysia or Indonesia, when really the cargo was made in China, shipped to Malaysia and Indonesia, and then reshipped to the United States with a “Made in Malaysia” or “Made in Indonesia” tag. The U.S. importer, and any person or company who assists the false declaration to CBP is subject to a monetary penalty under 19 USC 1592 (commercial fraud), and potential seizure of merchandise by CBP. Additionally, the matter may be referred by CBP to the Homeland Security Investigations for a criminal investigation for violations of 18 USC 542 (criminal fraud), 18 USC 545 (smuggling) and 18 USC 1956 (money laundering).

Looking forward, some expect that Trump will back down from the 25 percent extra tariffs on Chinese products, China will retract its retaliatory tariffs on U.S. products and the U.S. and China will continue the greatest trade relationship in history. Failing to come to an agreement will result in an “economic Armageddon.” Prepare for significant inflation, stagnant economic growth and stock markets around the world to tailspin.

Peter Quinter is a shareholder and customs attorney at GrayRobinson where he is the chair of the U.S. Customs & International Trade Law Group. Quinter represents individuals and companies involved in international trade and transportation, including litigation in the federal courts located in Florida and the U.S. Court of International Trade in New York. He may be reached at (954) 270-1864 or by email at peter.quinter@gray-robinson.com.

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