As tariffs continue to play a major role in foreign policy, it’s important to work with the members of your supply chain to act quickly to avoid unnecessary cost increases—time is of the essence. The third list of Section 301 tariffs placed by the Trump administration to take proactive measures against China went into effect on September 24, 2018.
While these restrictions are outside of our control as suppliers and manufacturers, it’s important to analyze the best ways to handle these tariffs to minimize cost increases for you and your customers.
Background of Section 301 Tariffs
Section 301 is a critical component of the Trade Act of 1974, which allows the executive branch to investigate and take action against any discriminatory trade practices to encourage the offending country to change their policies.
In August 2017, the Trump administration began an investigation under Section 301 against China. On March 22, 2018, they released their findings and determined that “the acts, policies, and practices of the Chinese government related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.” This led to numerous actions being taken against China, including:
- A World Trade Organization (WTO) dispute
- Investment restrictions
The tariffs were released in waves with the first being a 25% tariff imposed on $34 billion worth of products. These have been extended in two additional lists of products later in 2018, with an additional $16 billion at a 25% rate and $200 billion at a 10% rate.
- $34 billion value
- Tariff Rate: 25%
- Effective July 6, 2018
- $16 billion value
- Tariff Rate: 25%
- Effective August 23, 2018
- $200 billion value
- Tariff Rate: 10%
- Effective September 24, 2018
Note: These tariffs were originally released at a 10% rate and scheduled to increase to 25% on January 1, 2019. According to a December 2018 statement, the President agreed that the tariffs on the $200 billion worth of product would remain at 10% if an agreement can be reached by March 1, 2019. If not, the increase will take place.
Impact of US Tariffs
Whether you have an internal sourcing team, or you’re expected to manage trade compliance yourself, you can benefit from a partner who has factory relationships in multiple countries outside of China as you create a strategy to manage the Section 301 tariffs on China. Here are some potential strategies to consider:
Check the Exclusions List
A good place to start is the exclusion list. Many companies have (and continue) to file for exclusions to the Section 301 tariffs through the US Trade Representative. These requests can be reviewed by the public and are retroactive to the date the tariffs were imposed. Section 301 exclusions apply to all importers of a product, no matter who filed the exclusion. The first round of nearly 1,000 exclusions was published on December 21, 2018. These exclusions were for the first list of $34 billion worth of imports. The exclusions are updated for each list on the USTR website periodically.
Evaluate Your Product Designs
Another option is to evaluate your product and rework the design. A slight change might provide you with a good alternative to handling the tariffs. Work with a partner to analyze your design, understand the materials and the complexity to produce the product. A good partner can use this information to provide you possible options and alternatives to manage costs while tariffs are active.
Explore Sourcing Alternatives
Is it possible to source your product from another country? This is another alternative to manage the products that are impacted by Section 301 tariffs. As you start looking for alternative countries to source your products, build relationships with partners who have established factory relationships in those other countries so you can quickly adjust. This will save time and money and may not interrupt your supply.
Harmful Ways to Manage Tariffs
While tariffs present a very real threat to many companies, it can be tempting to try to avoid them through some means that are both illegal and dangerous to your business.
Transshipment to Avoid Tariffs
Some importers of products from China may attempt to avoid tariffs by transshipping their products through another country. Transhipping means shipping China-made goods to a country (whether in Asia, such as Vietnam or India, or in North America, like Canada) before shipping to the US. They may relabel the products with a different country of origin and then export their products to the United States hoping to avoid the tariffs through Section 301. However, this is illegal, and the US government continues to crack down on transshipping, with more force written into the new tariffs.
Reclassifying Your Products
Some importers may reclassify their products to remove them from the Section 301 tariff list and related tax increases. While there may be cases with a valid argument for reclassification, be cautious as any reclassifications occurring now will draw the attention of the US Customs and Border Protection scrutiny.
Working with a sourcing partner that has extensive experience can help you find the most cost-effective solution to manufacturing your products without using tactics that are illegal or risky for your business.
As the tariffs and trade wars continue, a sourcing partner with specific experience and insight is your most important asset to minimizing the interruption of your supply chain. A partner with diverse factory relationships in multiple countries and years of experience can help!
Al is an entrepreneur, founder, and owner of multiple businesses, including Altraco, an outsourcing and contract manufacturing company. Working across multiple continents and trusted by Fortune 500 companies, Al finds innovative solutions to traditional supply chain challenges. He is a member of Vistage Worldwide.