Avoiding the New Tariffs on China Products: Substantial Transformation is Key

My law firm’s international trade lawyers have been working double-time explaining to clients President Trump’s 25% tariff on Chinese products, helping them figure out whether their products are or are not on this tariff list, and helping them figure out what their options are if their products are on this tariff list. I have been cc’ed on a ton of these emails in the last week and the below is an amalgamation of them, put forth here to help companies that import from China understand what at least some of the common issues are that they are and will be facing.

The below is an amalgamation of a slew of emails, with any and all identifiers stricken. I have set them up as coming from HB INTERNATIONAL TRADE LAWYER (the HB is for Harris Bricken — my law firm) and our various clients are referred to as CLIENT.

CLIENT: I figured you would be the best people to consult for this. If the Trump tariffs do happen we would like to know what our legal options to combat/reduce this? Also, what if we suspect a competitor has been skirting the tariffs already? Can we report them effectively and anonymously?

HB CHINA LAWYER: I will turn you over to one of our international trade lawyers and you should get an email from one of them shortly. As you can imagine, they’ve been extremely busy since the trade war began and but I know they have dealt extensively with exactly the issues you raise (how to deal with the trade war legally and how to handle competitors who deal with it illegally). It is theoretically possible to make an anonymous complaint, but I’ll defer to our international trade law team on whether that’s advisable in your particular situation.

HB INTERNATIONAL TRADE LAWYER: It sounds like you are interested in learning more about (1) whether you can get a tariff exclusion/ exemption for your particular products; and, (2) whether you can report your competitors who may be illegally circumventing the tariffs by mis-declaring the country of origin or product description.

For #1, it would be helpful to get a list of the products for which you wish to seek a tariff exclusion. For each product, please provide a description of the product as listed on your invoices/website, and also identify the HTS (Harmonized Tariff Schedule) code used to identify the product for US imports. The tariffs identify which products are covered by the HTS#s.

For each product, are you aware of any US producers of this product?  Any third country producers of this product?

What is the estimated total US consumption of this product for the past three years 2016-18 and for the next few years (2019-21).

For #2, trying to report the wrongdoings of others is challenging because of the difficulty in getting hard evidence that proves it. Though it is possible to build a case from circumstantial evidence, it would still be necessary to somehow demonstrate a factual basis for a claim that a Chinese product is being mis-declared as a different product or from a different country. We should discuss by telephone the kind of information you already have to see whether it would be worth trying to pursue this kind of action.

Let me know if there is a good time for us to talk.

CLIENT: The below answers your questions as best we can.

          Product Information. Final assembly is done by a main factory based in ________, China. The product then gets shipped via containers to fulfillment centers around the world, including to three different U.S. states.
We get the following product from China:

Product One: ____________________

Description: ___________________________________________________________.

HTS: ____________________

          Other Producers. There are other much smaller producers but the entire supply chain for everybody is pretty much just in China.

          Other country producers. Korea and Taiwan also produce this product, but only the ultra-high end and only in pretty insignificant quantities. We are hearing talk of Thailand and Vietnam and maybe Indonesia starting to produce as well, but we have yet to see this.

          Estimated Consumption. Estimated yearly US consumption for 2016-2021:
2016: $____
2017: $____
2018: $____
2019: $____
2020: $____
2021: $_____

What if we shipped the container to Vietnam and then swapped our product into another container. Will we still be liable for the tariffs? One of our factories is insisting this will “fix” the tariff problem but I find it hard to believe it can really be that simple. But what if we ship our product to a factory in Vietnam and they check each one to make sure they are in good order and then they tighten the screws on them, etc., and then load them onto a new container and ship them to the United States? Would this relieve us of having to pay the tariffs?

HB INTERNATIONAL TRADE LAWYER: Thanks. This is good information that we can use to figure out how best to make an exclusion request for your products. USTR should be announcing the schedule/process for the List 3 ($200 billion) products that are now facing a 25% tariff that should be similar to the exclusion process for the previous two tariff lists.

As to the last part about circumventing the tariff, these are clearly fraudulent actions that likely would trigger civil penalties and perhaps even criminal charges. Regardless of whether you swap containers in a third country or move your product to a factory in a third country to repackage/ relabel the goods, fundamentally the products still will have a China country of origin and these actions will not legitimately change that. If those goods are declared as having a Vietnam origin on a US customs entry declaration, that would be a materially false declaration that would subject anyone involved to potential monetary penalties under US Customs laws and possibly even criminal prosecution.

I think these are probably the likely scenarios that your competitors may be engaging in. To the extent you are able to get any solid information about other companies doing this kind of illegal transshipment, this could be used to bring a claim that would lead US Customs to go after these competitors.

It is possible to change the country of origin of the product to Vietnam, but to do so there has to be enough production/processing that occurs in Vietnam so as to constitute a “substantial transformation” of your product. You might be able to have certain parts produced in China, but other parts produced in Vietnam that are significant enough so that the product could then be considered to have been “made in Vietnam.” But if your product is simply assembled (e.g., screwdriver operation) of parts that were all made in China, that very likely would NOT be enough to make that product a Vietnam origin product. Substantial transformation is a highly fact-specific analysis that does not have a simple formula, but rather is done on a case-by-case basis.

To give you a better idea of what substantial transformation really entails, I urge you to read this blog post written by one of our customs lawyers back in 2015, entitled Made in China? You should also read this blog post, China Tariffs and What to do Now, written by one of our international lawyers about six months ago. I suggest we then set up a time to talk.

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