Importers are being affected by 25% additional duties imposed on commodities coming from China into the United States, what are the short-term impacts to the manufacturers supply chain and as an Importer what steps can you take to mitigate your risk and maintain your product profitability?
What is Section 301?
Section 301 is a section of the Trade Act of 1974 in which the US Government can “initiate an investigation to determine whether” a country’s “acts, policies or practices are discriminatory and burden or restrict US Commerce[i].” In this specific instance the U.S. Trade Representative (USTR) was directed by the President to investigate China.
Through this investigation the USTR determined there was an impact on U.S. Commerce. Following these findings President Trump announced the U.S. would impose additional tariffs on imports of certain Chinese products. The initial list (See the full breakdown of commodities included in List 1) of products affected is effective on July 6th. There is a secondary list (See the full breakdown of commodities included in List 2) of proposed products that is being considered with no current implementation date.
What are the short-term impacts to the supply chain in relation to the additional tariffs the US government is imposing on Chinese made products?
If you are a manufacturer or a retailer, determining the importer of record will play a key role in determining the impact Section 301 could have on your supply chain costs. Do you know how your products from China entered into the USA? What are your shipping terms? Are you the importer of record? Is your supplier or customer? Identifying the importer into the USA is vital to understanding who will be responsible to the U.S. government for the additional duties. After determining who is obligated to the government, you can then consider the impact to the product cost and profitability.
As the importer, if you are responsible for paying the additional duties you may consider checking with your customer to see if they can absorb some of the additional duties that were not part of the original pricing analysis or negotiate new pricing with your supplier, so the supplier absorbs some of the additional cost. Be sure to notify your sales teams of the increased cost of the imported products so that they can evaluate and increase the sales price or eliminate discounts on those products so that they remain profitable.
Another key area that will have an impact to your bottom line or even delay your shipments and disrupt your supply chain is customs bonds. You should evaluate customs bond amounts for sufficiency. If CBP rules your bond to be insufficient any shipment entered after the insufficient determination will not get released by customs until a new bond of the appropriate size is established.
The short-term implications have been addressed, now what?
Once the short-term impact is identified and communicated internally it is time to examine the longer-term effect, and consider potential solutions to reduce the company’s risk. There are three primary areas of focus; 1) Harmonized Tariff Schedule (HTS) classification of the product, 2) rules of origin for the product, 3) countries that are the top manufacturer of similar products to determine if a sourcing change can be made.
When evaluating the classification of the product, consider manufacturing options that would allow for a classification change. Can an additional component be added or removed that would change the HTS code of the product to a classification that is outside of the 301 scope? In the same way examine the rules of origin for the product. Is there an ability to move the country of origin conferring operation to another country outside of the USA? Which step in the process gives the product its country of origin? Is it cost-effective to ship components to another country to complete the manufacturing or assembly process prior to importing into the U.S.?
Finally, work with your procurement department to identify other sources from one of the other 193 countries in the world to make the product for you. One tool that can help the sourcing department is the United States International Trade Commission (USITC). The USITC website offers the ability to run a query of amount of imports for an HTS by country. Determine what country other than China has a significant amount of similar product being manufactured. As an example, household dishwashing machines 8422.11.0000 are covered in the effected 301 products. If looking for a new source, examine the date on the DataWeb section of the USITC site and run a report on which country most of these machines are coming from. According to the January-April 2018 data, China is the largest exporter of this product to the U.S., accounting for 32%[ii]of importations. South Korea at 28% and Germany with 18% are the next two largest countries behind China. Work with your sourcing personnel to show them this data so they can begin to look at options in other countries where the total landed cost may make sense in the long term to shift production to a new location. The sourcing department can investigate potential other manufacturers of the product and see how their pricing compares when the additional 301 duties are factored in.
International trade rules are continually changing, and compliance departments must be flexible and visionary. To limit risk compliance departments should be working with sales and procurement departments within their companies. Some regulations are implemented quickly (Section 232 Tariffs on raw steel and aluminum) or over a few months (Section 301 tariffs). As the expert on customs requirements, the compliance department of a company should provide the background and potential options to their management for evaluation and actions.