US-China Trade and Tariff Updates

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Annik  

Hello everyone. We’re back with another simply trade news roundup. My name is Anik. I’m your host. If you didn’t know by now, hopefully you do and have been listening for a while. If you’re new here. Awesome. Glad to have you. I have another guest with me, and I’m really excited, because I’ve been meaning to get her on since icpa, but things get crazy, and I didn’t ask, and I didn’t get to, you know, get her information, but then it fell into my lap, and it also happened, and this is wild, because it’s her birthday today, so wish her a happy birthday. Now immediately. Comment, happy birthday. We’ll count it. So go to LinkedIn and comment real quick and belated, because this episode comes out on Monday. Unfortunately, I’m recording on Thursday, but today it’s her birthday, so let me introduce her. Her name is Mollie Sitkowski. She’s a trade compliance partner with Faegre Drinker. Welcome. Thank you so much for coming, and happy birthday.

Mollie Sitkowski  

Thank you. I do have to say these opinions are my own. They are not of the firm, and I am not providing any legal advice. So just want to say that,

Annik  

yeah, I kind of want to address a big deal that happened just this week, which, if you’re hearing this last week, which is the US China trade deal, 90 day trade deal. What are your thoughts? Well, I

Mollie Sitkowski  

am happy, because I you know, it took everything down a notch. 125% is crazy. That’s not good. I know a lot of small business owners here in the United States, and they were very concerned about this. I have children. They love toys as much as I don’t love to have toys in my house. They love to have toys in my house. So they’re very excited about it. They know a lot about trade. So I’m, I’m happy. I just, I’m a big proponent of free trade, and so I’m, I’m very heartened by this news, and I’m hoping that it takes takes this trade war down a notch, and we can all get to where we need to be to start negotiating, and to get to a place where everything is kind of at a more neutral level, and people can start getting what they want from these trade negotiations,

Annik  

yeah. And what really are we looking at in these 90 days? So I know we were almost, I mean, 120 5% but it could go up to even 140 5%

Mollie Sitkowski  

right? Well, I mean even 245, and have you ever seen the movie clue? Okay, well, there’s this whole joke at the end of the movie, because they have a gun, and they’re trying to count how many times they’ve shot the gun to figure out how many bullets are left. And they’re like, one plus two plus one plus two, and so they’re all counting. And that’s how I felt on Tuesday. So this is Tuesday the 13th. I was like, well, so it’s a 10% reciprocal tariff from China. It’s 20% IEPA, fentanyl tariff plus whatever underlying 301, tariff you have. And so that usually gets you to 10 plus 20. Plus 25 it’s 55% so that’s what I kept saying all of Tuesday. And then I was like, but if you have aluminum and steel, then you’re at a 25% tariff plus a 20% IEPA fentanyl tariff plus whatever underlying 301 tariff you had. So equals 70% so I felt like I was living the whole clue movie, the entire day. It seems like there’s still a lot of tariffs. Oh, yeah, I mean, so we’re dealing with a likely, most likely scenario of 55% tariffs on China, if you’re talking General 25% underlying section 301, original Trump tariffs, plus whatever the ad valorem rate is on that tariff classification. So that’s a 55% plus the ad valorem. Or if you have aluminum and steel from China, you’re looking at a 70% plus the underlying tariff. So those are huge numbers, right? So there are still really large tariffs, and that number is not okay for some people. I mean, even the underlying 25% during Trump one was enough to push manufacturing outside of China,

Annik  

and within with that, what has been the biggest like thing you’ve seen within businesses or people coming to you that is going on with China, like trade with China? Because I know there’s been, you know, a lot of how do we deal with and I know there’s a lot of scrutiny right now with brokers, because businesses are trying to get away with lower tariffs and and like asking their brokers to do so, and then it probably gets to you later on, because ultimately, if you do that, you’re going to get in trouble with CPP, and there you go with a huge fine. So what is something you’ve seen? Um. Um happening in that sense?

Mollie Sitkowski  

Well, there are still things that you can do. So obviously, moving a manufacturing line takes six to 12 to even 18 months, so that’s a little harder. So if you’re moving manufacturing out of China, if you didn’t do it during chump one, that is a long term plan that takes longer. And then you need to look at, if you’re moving the manufacturing line, are you doing enough to substantially transform your components such that they are not, you know, the final product that you’re importing is not Chinese origin, because we have a substantial transformation test here in the United States, we don’t have a value add test, which I know, you know some Asian countries have. We don’t have a tariff shift test. We have a very gray, substantial transformation test. So

Annik  

if you have those tests like, is that a good thing, or is that a bad thing?

Mollie Sitkowski  

So we actually tried to change it to a tariff shift test back in the early 2000s because our our, usmca or NAFTA Rules of Origin are a tariff shift test. And so CBP actually wanted to try and change everything to a tariff shift. And the importers that actually was probably more the lawyers were like, no, we want to keep our substantial transformation test. It’s so gray, and we get to make all sorts of legal arguments. And so we wanted to keep it. And then during Trump one, CBP really turned it on its head. And now they love the substantial transformation test, because they can basically use whatever thing they want, you know, they can look at the essence, you know, is the essence of my phone, the PCBA, and is the PCBA from China, and then customs will be like, Oh, now the essence of your phone is the PCBA and it’s from China. And so now it’s Chinese origin, or they’ll be like, Oh, 60% of the components are from China, and it’s Chinese origin. So customs kind of turned it around on its head, and now uses it against us. But initially it was the importers who wanted

Annik  

substantial transformation. Now you’re opposite. Yeah, great. And if your marks, would that help you guys right now in this situation, and would would this help businesses? Or,

Mollie Sitkowski  

um, I don’t. I think it would help suppliers kind of understand, because that’s a lot of the problem right now is so many European suppliers, so many Asian suppliers are trying to figure out, Okay, we have Chinese components. We don’t want our purchasers here to have to pay, you know, 145% well now it’s 55% but so many, so many people outside the United States are trying to understand, it’s just so hard for them to understand substantial transformation. So that’s a substantial transformation is a long term goal, though there’s still short term mitigation that you can do. And some of the short term mitigation you can do is, you know, look at your tariff classifications, because the aluminum and steel tariffs don’t stack with the reciprocal tariffs, and for some of those, you only pay the aluminum steel tariffs on the content rather than the full value. So you can still look at tariff classification. Chapter 98 is our duty free provisions here in the United States, there are some chapter 98 provisions you can use which provide duty relief from the reciprocal tariffs, from the IEEPA fentanyl tariffs, and depending on who you ask, from the section 232, tariffs.

Annik  

All right, well, last thing on China and us. So overall, how should businesses prepare? Especially this is only for 90 days. So they’re saying that 90, after these 90 days, it’s going back to 3534 34 Okay, thank you. 34 so like, How can a business prepare with that? Because, like, now it’s, you know, in 34 is weird, because on top of those 34 you’re again putting IEEPA, you’re putting 301, so then we’re almost at 100 again. So how can they move forward and thinking about, Okay, right now we’re only paying 55% or whatever stock with, you know, the all the tariffs and what the IEEPA and included them like, moving to this onto another set of terrors coming from 145, or 250, or whatever we’re we’re coming from, like, how are we preparing as a business that we’re not scrutinizing our own business?

Mollie Sitkowski  

So, I mean, it’s basically a gamble. Like, do you think they’re gonna go away in 90 days? Or do you think they’re going to go up? I think they’re going to go up, not by much. But when Trump was on the campaign trail, he said he was going to have collar tariffs. So he was going to have tariffs on every country of 10 to 20% where are we right now, with every country except China, 10% 10. What was the deal with UK? 10 we are going to, I think we’re going to stay, don’t, you know, don’t hold me, yeah, because it’s hard to tell. It’s the anything can happen Trump administration. But we’re at 10% with UK after a deal was made, I think we’re going to stay at 10% with everyone. Trump said 60 to 100% on tariff, tariffs on China on the campaign trail. We’re at 55% right now, when you include everything. So I think a good number after, after the 90 days is up, is either going to be 20% or that 34% and I think 20% is gonna make China feel like they got a deal, and it’s gonna make Trump feel like he’s at that 60 to 100% so I have a bottle of wine, a nice one that was one of my coworkers that we’re gonna be At 20% after 20% reciprocal, plus the 20% IPA, plus the underlying 301, and that’ll get us at 65%

Annik  

Yeah. And 65% is not going to work for a lot of businesses, if that’s what we’re set for three four years, they just can’t do it. And, and, you know, and we’re not even talking about anything else that’s happening in the United States, you know, with normal people. We’re just talking trade. We haven’t even touched consumers. And consumers make your business work. So, um, if consumers can’t buy your goods, especially because they’re too high or, you know, that’s one thing, or you can’t even get your goats over here because you don’t have the money to pay the tariffs, then you’re out of business. So that’ll be interesting to look at, and something so thank you for that, and something interesting too. That was said, and it’s not a conspiracy theory, because it was written on truth social. So it is like something to consider, because everything that’s been on truth social has kind of become reality to us. And one thing that is is tariffs on movies. So that’s a little different trade. Customs can’t

Mollie Sitkowski  

do that. They can’t handle tariffs on non physical goods, right? So it would have to be under the external revenue service, or it would have to be like a sales tax, a federal sales tax, like streaming platforms, is the only thing I can think of. So it would be equivalent to a digital a digital services tax, which other countries are implementing. So we probably have to take a cue from how they do that, but it would likely be specific to streaming platforms, I think,

Annik  

yeah, and that’ll be great, because I watched enough. I love Netflix. Love, you know, love a good show. Unfortunately, that might get expensive. We’ve been seeing a lot more things getting expensive. So I saw Walmart actually made a comment that their goods are getting more expensive, which is crazy, because that message I saw yesterday, and, you know, Chinese goods were just, I mean, we just got lower tariffs. So why are our goods still going up? You know, there’s, it’s a little bit weird. And I think that someone said that we’re not going to see the problems happening immediately. When the tariffs are set, we’re going to see it weeks later, right? Well, months later, really later, okay, so we’re not even in the in the midst of it all. No,

Mollie Sitkowski  

because, I mean, right now, most companies are like, can we absorb this? Is this short term. And then when they realize, okay, the 10% are in place, the 65% or whatever is in place, then they have to think about, okay, what percentage of this Can we absorb? What percentage are we going to have to pass along to our consumers, right? And so that’s at that point in time, is when we’re going to start seeing an increase in the prices. Is after people figure out what is actually long term here, and people just don’t know what that is.

Annik  

But what are three pieces of advice that you can think of?

Mollie Sitkowski  

Um, no. Number one, just kind of, especially if you’re importing from Mexico and Canada, check your check your work, check what your brokers are doing to make sure that you’re taking advantage of the usmca exemption. Number two, check in with your suppliers, especially those around China or in China, to make sure that they are haven’t reduced the price that they’re charging you and issuing you second invoicing. We’ve had so many questions about second invoices, guys, so like so many suppliers in China, are like, Hey, can we just issue you an invoice for, like, the cost of the good, and then issue you a second invoice for the engineering and our profit, etc, and then you don’t have to pay tariffs on that, because the the cost of the good is just going to be on the invoice that comes and we have to be like, No, do not. Can’t do that. Oh, it has to all be included in the value of the good. And if you get caught by customs, that’s very bad. There is no reasonable care argument I can make to get you out of that.

Annik  

If there’s two invoices, how would, how would they know if this invoice is not on a good you know, it’s so

Mollie Sitkowski  

what they when they come in, and if they ask you, so they issue a request for information, a customs form, 28 and they check that, check the value box, and they say, you know, provide us the payments that you made. Provide us the invoice you know that accompanied this shipment, and then provide us the payments you made related to this shipment to your

Annik  

supplier.

Mollie Sitkowski  

And so some people might only provide the payment specific to that invoice right. And customs can also come in and ask for a list of all the payments made to that supplier, and then they check the value declared from that supplier, and then they also see that year line. So the basically, the rule is that the price declared at the time of import, if it’s a sale, includes the price paid or payable by the buyer to the seller, and customs assumes that any amounts paid by the buyer to the seller relate to the imported merchandise, and therefore should be included in the value. And it’s incumbent upon the buyer to prove that any amounts paid to the seller do not relate to imported merchandise. So if you have you know, if you have two invoices, it’s likely that they relate to the imported merchandise.

Annik  

And it makes sense that businesses are like, this sounds great. Actually, this sounds perfect for us, like we’re saying we’re saving, we’re sold. This will be great.

Mollie Sitkowski  

Another thing to watch out for is, in other countries, they have this value added rule, or they have this tariff shift rule, and so they say, Okay, we’re taking, you know, this is an article of plastic, let’s polypropylene, 3901 and they extrude it. And while extruding would be a substantial transformation, but let’s say they were doing less than that, and it’s just a straight tariff shift, and they’re changing it from and they’re just putting a lid on it. So let’s say it’s just an article of plastic. They put a lid on it, and now they call it a cup. And so in another in another country, changing it from an article of plastic to a cup would change its tariff classification, but that likely wouldn’t be enough for us to substantially transform it. And so you do need to check in with your suppliers on how they are determining origin, if they are using Chinese components, so and then, in a lot of Asian countries, they have like a 35% value add. So let’s say they’re literally just screwing the top on and putting and the straws from Vietnam. But the screwing and the straw add in 35% or even the profit in Vietnam. Add in 35% and they’re getting a certificate of origin as Vietnamese. And they say, Well, now it’s Vietnamese, but literally, this whole thing is from China. That would not be enough for us. So it’s very important to check in with your suppliers on the value they’re charging and how they’re determined country of origin.

Annik  

Okay, country of origin. You know what country of origin has been noted by a lot of people, and I think anyone who’s listening should be completely trained on country of origin right now to fully understand this again. Thank you so much for coming on to the simply trade podcast, and we really appreciate it. Thanks

for having me. Thank

Lalo  

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