Avoiding the Effects of the US/China Trade War
There is a well-established saying that wars are easy to start and hard to end, and the same can be said of trade wars. The US and China have been locked in a trade war since 2018, with the US imposing tariffs on Chinese imports in an effort to reduce the US trade deficit with China. The question remains: is the US-China trade war still going on? It's a complex issue, but it's clear that the effects of the trade war are still being felt by both countries.
These tariffs, known as Section 301 tariffs, have had a dramatic effect on US importers who have been trying to find ways to avoid paying them, including through new sourcing arrangements, tariff engineering, and other methods.
Strategy 1: (Re)sourcing
One strategy for avoid 301 tariffs is exploring alternative sourcing options, such as looking for suppliers in countries other than China. However, this is a tricky process, as importers need to be sure that the quality of the new products meets their standards, and that the new suppliers are reliable and cost-effective.
Even when you do find an alternative supplier, how do you prove the goods were actually manufactured outside of China, and not "transshipped" to the port of export from the PRC? Let's take a deep look at how this can happen, and talk through several examples of ways importers can prove country of origin.
One strategy is to get a certificate of origin from the supplier, which is a document signed by the exporter that states the country of origin of the goods. This is an important document when it comes to avoiding Section 301 tariffs, as it provides evidence of the origin of the goods.
Another way to prove the origin of goods is to ask for a bill of lading from the supplier. This document is issued by the carrier and provides detailed information about the shipment, including the country of origin.
Finally, importers can use their own internal process to trace the origin of their goods. This includes conducting a thorough audit of the supplier's production process, asking the supplier to provide evidence of the various stages of production, and talking to the transporter to get more information about the shipment.
Strategy 2: Tariff Engineering
Another potential strategy to mitigate the impact of the trade war and Section 301 tariffs is to try and reclassify the goods in order to pay a lower tariff. This involves carefully studying the customs classifications of the goods in order to find a different one that results in a lower tariff rate. However, this requires a great deal of expertise, and can be a complex and costly process.
Tariff engineering, also known as tariff optimization, is the process of changing the classification of a product in order to reduce the amount of tariffs imposed. By studying the details of the goods, one can find a more favorable classification for the goods. This requires understanding the Harmonized System (HS) codes, which are used by customs authorities to classify goods for taxation.
For example, a company may have imported goods from China that fall under the HS code 8517.60.00, which carries a tariff rate of 25%. However, if the goods are reclassified to under the HS code 8517.30.00, the tariff rate drops to 10%. This is a significant difference, and could be a huge money-saver for companies.
The process of tariff engineering can be both time-consuming and costly. Companies must invest in the services of a professional tariff engineer, who can study the details of the goods and find the best HS code to classify the goods under. In addition, there is a risk that the goods will be reclassified back to the original HS code if the customs authority decides that the reclassification was not appropriate.
In today’s global economy, tariff engineering is becoming increasingly important for companies that frequently import goods from China. Companies must carefully consider the risk and cost of tariff engineering compared to the potential savings it can provide. Ultimately, it can be a great way to avoid paying high Section 301 tariffs imposed as a result of the US-China trade war.
Strategy 3: Absorb the Cost?
In addition to the direct costs of the tariffs themselves – estimated to be around $34 billion in 2019 – the indirect costs of the tariffs could be even higher. These costs include the complexity of the new tariffs, the need for importers to adjust their supply chains, and the potential for price increases on imported goods. Some US importers have resorted to simply absorbing the costs of the 301 tariffs, and passing them on to the consumer. This can be a controversial move, as it can lead to higher prices for consumers. It can also put importers at a competitive disadvantage, as their competitors may be able to find ways to avoid the tariffs.
Rather than absorbing the cost of tariffs, reducing them via other means can be a more desirable approach. This can be done through various methods, such as by filing for exemptions or exclusions for specific products, negotiating for tariff reductions, or using duty drawback programs. There are a number of legal and cost-effective ways to reduce the cost of tariffs, which can help importers to remain competitive and minimize the impact of the tariffs on their customers.
In addition to reducing costs, reducing tariffs can also help stimulate trade between the US and China. Tariffs can be an obstacle to trade, as they can act as a barrier to entry and discourage foreign investment. Reducing tariffs can help to create an environment that is more conducive to trade, as it can make it easier for businesses to engage in international trade. This can help to foster economic growth and job creation in both countries, and can help to create a healthier global economy.
Overall, reducing the cost of tariffs via other means can be a more desirable approach than simply absorbing the cost of tariffs. It can help to reduce costs for importers, which can help them to maintain competitiveness and keep prices low for their customers. It can also help to create a more conducive environment for trade between the US and China, which can help to foster economic growth and job creation. If done compliantly and cost effectively, reducing tariffs can be a much more beneficial option than simply absorbing the cost of tariffs.
Complications and Risks
In summary, US importers have been forced to confront a range of complex challenges in order to avoid paying the Section 301 tariffs imposed as a result of the US / China trade war. Finding alternative suppliers, reclassifying goods, and absorbing the costs of the tariffs are all potential strategies, but each has its own set of complications and risks.
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