1. Manufacturing in China is Risky
For many, the short answer is yes. Let me explain….
2. U.S. Tariffs Make Manufacturing in China Risky
First there are the tariffs, which come and go and come and go, but are always a risk for any company that buys product from China for sale in the United States. They are a risk because the $10 widget you buy from China today may cost you $12.50 if you end up having to pay a 25% tariff on it in the end. Yes, there are all sorts of things that can be done (and my firm’s international trade lawyers seem to be spending half their waking hours doing these things for our clients), but in the end your product prices from China will almost invariably go up.
3. U.S. Duties Make Manufacturing in China Risky
Then there are the duties, which for many of our clients are (and should be) the scariest thing of all. These are typically anti-dumping and countervailing duties imposed on Chinese products by the United States and the European Union. Far too few companies are familiar with these duties until they get hit with a massive bill for them. The United States International Trade Commission describes these duties as follows:
Under the Tariff Act of 1930, U.S. industries may petition the government for relief from imports that are sold in the United States at less than fair value (“dumped”) or which benefit from subsidies provided through foreign government programs. Under the law, the U.S. Department of Commerce determines whether the dumping or subsidizing exists and, if so, the margin of dumping or amount of the subsidy; the USITC determines whether there is material injury or threat of material injury to the domestic industry by reason of the dumped or subsidized imports. For industries not yet established, the USITC may also be asked to determine whether the establishment of an industry is being materially retarded by reason of the dumped or subsidized imports.
Antidumping and countervailing duty investigations are conducted under title VII of the law. The USITC conducts the injury investigations in preliminary and final phases.
Preliminary Phase Antidumping Investigations (Imports Sold at Less Than Fair Value) and Preliminary Phase Countervailing Duty Investigations (Subsidized Imports)
When: After the simultaneous filing of a petition with the USITC and the U.S. Department of Commerce, the USITC conducts a preliminary phase injury investigation.
Duration: The preliminary phase of the investigation usually must be completed within 45 days of the receipt of the petition. If Commerce has extended its deadline for initiating the investigation, the USITC must make its preliminary injury determination within 25 days after Commerce informs the USITC of the initiation of the investigation.
Finding: The USITC determines, on the basis of the best information available to it at the time of the determination, (1) whether there is a “reasonable indication” that an industry is materially injured or is threatened with material injury, or (2) whether the establishment of an industry is materially retarded, by reason of imports under investigation by the Department of Commerce that are allegedly sold at less than fair value in the United States or subsidized.
If the USITC determination is affirmative, Commerce continues its investigation. If the USITC determination is negative, the investigation is terminated. However, if the USITC, in making a preliminary or final determination, finds that imports from a country are negligible, then the investigation regarding those imports must be terminated. Imports from a country under investigation are deemed negligible if they amount to less than 3 percent of the volume of all such merchandise imported into the United States in the most recent 12-month period preceding the filing of the petition for which data are available.
There are exceptions to this rule. One exception is that when imports from more than one country are subject to investigation as a result of petitions filed on the same day, imports from one or more of those countries under investigation will not be deemed negligible if the sum of imports from countries subject to investigation whose imports are less than 3 percent on an individual basis collectively amounts to more than 7 percent of the volume of all such merchandise imported into the United States. Further, if there is a potential that imports will imminently exceed the 3 percent or 7 percent thresholds, such imports will not be deemed negligible for purposes of the USITC’s threat determination. There are also other exceptions to the negligibility rule.
Final Phase Antidumping Investigations (Imports Sold at Less Than Fair Value) and Final Phase Countervailing Duty Investigations (Subsidized Imports)
When: After a preliminary affirmative determination by the Secretary of Commerce (or after a final affirmative determination if the preliminary determination was negative) that imported products are being, or are likely to be, sold at less than fair value or are subsidized, the USITC conducts the final phase of the injury investigation.
Duration: The USITC final phase injury investigation usually must be completed within 120 days after an affirmative preliminary determination by the Secretary of Commerce or within 45 days after an affirmative final determination by the Secretary of Commerce, whichever is later. However, in cases in which the Commerce preliminary determination is negative but the Commerce final determination is affirmative, then the USITC final injury determination must be made within 75 days.
Finding: The USITC determines (1) whether an industry in the United States is materially injured or threatened with material injury, or (2) whether the establishment of an industry in the United States is materially retarded, by reason of imports that the Department of Commerce has determined to be sold in the United States at less than fair value or subsidized.
If the USITC determination is affirmative, the Secretary of Commerce issues an antidumping order (in a dumping investigation) or a countervailing duty order (in a subsidy investigation), which is enforced by the U.S. Customs Service. If the USITC determination is negative, no antidumping duty or countervailing duty orders will be issued. If the USITC makes a finding of negligibility, the investigation regarding those imports will be terminated.
USITC determinations may be appealed to the U.S. Court of International Trade in New York City, or, in cases involving Canada and/or Mexico, to a binational panel under the auspices of the North American Free Trade Agreement. (For further information on antidumping investigations, see section 731 et seq. of the Tariff Act of 1930, 19 U.S.C. 1673 et seq. For further information on countervailing duty investigations, see section 701 et seq. of the Tariff Act of 1930, 19 U.S.C. 1671 et seq.)
Section 753, Tariff Act of 1930
In the case of a countervailing duty order with respect to which an affirmative determination of material injury by the Commission was not required at the time the order was issued, interested parties may request that the Commission initiate an investigation to determine whether an industry in the United States is likely to be materially injured by reason of imports of the subject merchandise if the order is revoked. Such requests must be filed with the Commission within six months of the date on which the country from which the subject merchandise originates becomes a signatory to the Agreement on Subsidies and Countervailing Measures. (For further information, see section 753, Tariff Act of 1930, 19 U.S.C. 1675b.)
The following four things make up most of what you need to know about these duties:
1. These duties mostly apply to products subsidized by a foreign country. China clearly subsidizes many of its products and it arguably subsidizes all of them. China is the highest risk country, by far, and its list of products subject to duties is roughly five times more than any other country.
2. These duties can be massive and they typically range from 50% to 200%+.
3. These duties can be imposed retroactively. In other words, you may be hit with a 200% duty on those widgets you bought from China last year. Not kidding.
4. Having your China products go to some other country before you bring them into the United States or the EU will not change a thing, other than to perhaps put you at risk for illegal transshipment fines and criminal penalties. See US-China Tariff Updates: What You Can do NOW. The US and the EU are aggressively seeking out companies that claim their products from China to be from somewhere other than China. The South China Morning Post did a story on this just today.
4. Tariff and Duty Risks on Products from China Keep Rising
In Importing From China (Directly OR Indirectly) has Big RETROACTIVE Risks, one of our international trade lawyers (who was at the time working on a massive case involving illegal transshipment that eventually led to a $62.5 million settlement), back in September, 2018, warned about the duty risks on China products:
If you are importing product originally from China covered by or even maybe covered by an antidumping or countervailing duty order, you must be very careful, no matter the country from which you are directly importing the product. Two recent U.S. Commerce Department decisions to expand antidumping (“AD”) and countervailing duty (“CVD”) orders on hardwood plywood to cover ready to assemble cabinets highlight this problem.
Earlier this month the U.S. Commerce Department issued a final scope ruling on Ready To Assemble (“RTA”) Cabinets in the Hardwood Plywood AD and CVD case, finding no exclusion for RTA cabinets. Commerce held that this exclusion from AD and CVD duties applies only to cabinets sold to an ultimate end user (the consumer) and not to RTA cabinets sold to contractors that then install them. With this ruling Commerce effectively expanded the AD and CVD orders to cover RTA cabinets sold to the construction industry, which many (most? importers previously believed were excluded by language in the AD and CVD orders.
The RTA kitchen cabinet exclusion does not expressly address the manner in which RTA kitchen cabinets must be packaged to be suitable for purchase nor does it expressly define the term “end-user.” Nevertheless, the exclusion’s requirements require RTA kitchen cabinets be “packaged for sale for ultimate purchase by an end-user” and be packaged with “instructions providing guidance on the assembly of a finished unit of cabinetry.”
This decision exposes US importers of RTA cabinets to millions of dollars in retroactive liability for AD and CVD duties. U.S. cabinet importers that stuck their head in the sand while this AD/CVD exclusion case was pending will likely soon be hit with an enormous bill from the US government.
Years ago, my firm’s international trade lawyers handled a review investigation involving high tech products from China covered by an AD and CVD Order for a Chinese exporter/producer company. Much to the Chinese company’s surprise, the Commerce Department had determined that this small Chinese company was a mandatory respondent and that meant it would need to respond to the entire Commerce questionnaire and be subject to verification.
The Chinese company explained that it had never exported these high tech products to the United States, but it admitted to having sold its products to a Canadian customer. It had no knowledge of what this Canadian customer did with its products and it did not know whether the Canadian company exported the products to the US from Canada.
Under United States AD and CVD law, sales made by a Chinese company and imported into the United states are generally considered to be U.S. sales by the Chinese company if the Chinese company knew when it made the sales that its products were destined for the U.S. In other cases, Chinese companies have been found to be respondents in AD and CVD cases if their packaging revealed that their products were ultimately destined for the U.S.
The problem for the Canadian companies and the U.S. importers in these situations is that the Chinese company that made the Canada sales of products that eventually go to the United States will usually not participate in the AD and CVD review investigation. But the US importer of the products from Canada will find itself owing substantial AD and CVD duties to the US government. I can remember a company that had to shut down its entire U.S. operations because it had exported chemical products from Canada to the United States that were covered by U.S. AD and CVD orders. All of a sudden, the U.S. subsidiary was hit with millions of dollars in retroactive liability because of an AD and CVD case.
US importers that import products from Canada or anywhere else in the world that are originally from China need to be careful right now because their products may be covered by United States AD and CVD orders. These companies could wake up one morning and find themselves liable for millions in dollars in retroactive AD and CVD duties. This is truly the sort of situation where an ounce of prevention is worth a pound of cure. Now is the time to review your supply chain for its China vulnerabilities, whether you import directly from China or not.
Since this post the number of new anti-dumping and countervailing duty cases against Chinese products has exploded, to the point that one of our international trade lawyers (who profits from just about every such case filed), had this to say about them in Another International Trade (AD/CVD) Petition Against China: This Time it’s Metal File Cabinets:
The last few months have seen an onslaught of trade actions brought by U.S. companies against incoming products of all kinds from China. With all the trade issues involving China and bipartisan anti-China sentiment prevalent in the United States, now is a great time to bring such actions. The international trade lawyers at my firm almost exclusively defend against antidumping and countervailing duty claims instead of bringing them. So I say this not to encourage more such actions, but as a simple statement of fact. If you are importing products from China, now is the time to know the trade risks of your imports.
Again, the international trade lawyers at my firm make our money by representing the Chinese manufacturers and their US importers so the more petitions brought against incoming Chinese products the more money we make. The more petitions, the more our law firm financially benefits and the more I personally financially benefit.
And yet, from an economic and policy standpoint even I am starting to get concerned by all these cases. I say this because of the massive onslaught of AD/CVD cases being brought against China and how aggressively (on multiple levels) the United States Commerce Department has been on these cases. To the point where I am finding myself wondering how important a trade deal with China will be if the United States giveth on the one hand and then taketh via these AD/CVD cases on the other hand. And is it right for the United States government to almost “on the sly” be pushing American (and foreign companies as well) away from China, without making this policy clearer?
Based on all that I hear from my own firm’s international manufacturing lawyers, many American and European companies are decreasing or eliminating their business with China. See The China-US Trade War and the Winner is. . . . MEXICO. It appears US foreign policy is to drive business from China to countries like Mexico, the Ukraine, Vietnam, Thailand, the Philippines, and Indonesia, among others. What this means big picture is that slowly but surely the price of products from China in the United States is rising and will continue to rise. So as one of our China lawyers so often tells our clients: “you need to act accordingly.”
To put it bluntly, it is open season right now on duty cases against Chinese products and so if having to pay a massive duty on your products scares you, you should be looking elsewhere for your product manufacturing, starting right now. And what is true for the United States is pretty much true for the EU as well.
5. Companies Are Moving Their Manufacturing Out of China
GoPro. The action camera company is moving the bulk of its production out of China to Mexico by mid-2019. It will still continue to manufacture its local products in the country. “Today’s geopolitical business environment requires agility,” GoPro CFO Brian McGee said in December. “We’re proactively addressing tariff concerns.”
Hasbro. The toymaker is shifting most of its production from China to Mexico, Vietnam and India due to Trump’s tariffs.
Steve Madden. The footwear and handbag maker, which ships the bulk of its goods from China, is shifting production to Cambodia. Executives at the Pawtucket, Rhode Island-based company previously said prices during the upcoming holiday shopping season would be higher as a result of the increased duties. “We’d love to make shoes in the United States,” CEO Ed Rosenfeld told NPR. But “it’s hard to envision a scenario where we’d make the types of products that we make, at the prices that we make them, in the United States.”
Stanley Black & Decker The firm is shifting production of its hallmark Craftsman brand to the U.S., where it is opening a new facility in Fort Worth, Texas. The company plans to hire 500 people for the $90 million plant, but will employ robots and other advanced technology to keep production costs in line with those in China.
Brooks Running The athletic footwear maker owned by Warren Buffett’s Berkshire Hathaway is moving production from China to Vietnam, largely due to the new tariffs. “We’ve had to make a long-term decision on this picture. It’s disruptive, but the reality. So we’ll be predominantly in Vietnam by the end of the year.” CEO Jim Weber told Reuters.
Whirlpool Corp. The company is moving the manufacturing of some of its KitchenAid appliances to the U.S. from China.
Intel Corp. CEO Bob Swan in June told Bloomberg the company is reviewing its supply chain and whether production can be shifted out of China.
6. Our International Manufacturing Lawyers Are Seeing the Following
A. Our biggest clients are mostly staying in China for the short term, but slowly moving production elsewhere and working on plans to move all or nearly all production out of China in the next few years, either by sourcing from factories outside China or by building their own production facilities outside China. These are the companies that have had been manufacturing in China for a long time, either with their own facilities or with good-sized Chinese companies. These companies are mostly looking at Vietnam, Thailand, Malaysia and Mexico.
B. Our mid-sized clients are really all over the map, depending largely on their own individual situations. Some are already completely out of China, some simply cannot leave for a long time, if ever, and some are slowly shifting their production to other countries. Those companies that have others make their products for them have been much quicker to leave. Those with their own production facilities are for the most part reluctant to pay to build out new factories outside China until their future becomes even clearer.
C. Our smaller clients are also all over the map, depending largely on their products. These are companies that do not have their own production facilities and they tend to be very risk averse. We are helping many of them find alternative supply sources in Vietnam, Thailand, Malaysia, Taiwan, and, to a lesser extent, Mexico and the Philippines. Finding alternative sources for many of these companies has been relatively easy and in most cases their new suppliers are charging less (oftentimes by considerable amounts) than what they were paying in China and that is not even counting their no longer needing to pay tariffs. But for certain products, China is pretty much it. Other clients sell such high quality, high margin items, it just does not make sense for them to use a new supplier. One client has a medical item made in China for twenty cents, which it then sells in the United States for eight dollars. It sees no reason to spend time and effort trying to find and onboard a new supplier so as to save a nickel.
What will you do? Will the tariffs impact your business? What about the duties?