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Section 301 Tariffs: Do You Have an Alternative Plan?

In 2018, United States responded to China’s unfair trade practices related to theft of American intellectual property and forced transfer of American technology by charging additional tariffs on certain products imported from China.

Under Section 301, there have been three rounds of product lists that received additional tariffs so far. The latest, put into place on September 24, 2018 affected a list of products with annual trade value of around $200 billion. It included goods such as textiles, handbags, yarns, hats and leather. They will be subject to an additional 10% tariff through December 31, 2018. The tariff was supposed to be increased to 25% as of January 1, 2019. However, after President Donald Trump met with President Xi Jinping of China at the beginning of December 2018, it was agreed that the tariff will not increase at January 1, 2019. Both sides will be negotiating a fair-trade deal, however, if they don’t come to an agreement within the next 90 days, the tariff will increase to 25%. Before the negotiation started to take place, the Trump administration was threatening to impose another round of tariffs which would include apparel and footwear, even though negotiations started, the future of these items are still uncertain. With so much uncertainty, do you have an alternative plan?

Finding factories in other countries

Some companies are thinking about seeking production in countries that are not impacted by the new tariff – including Free Trade Agreement countries or other countries that don’t have the additional tariff, such as Vietnam, Bangladesh, Indonesia, India and Thailand. The downside of this, is that the process is not easy and the other countries do not have the production infrastructure of China.

Finding a Chinese supplier that is seeking to open a factory in another country

There are some Chinese suppliers that are looking to open factories outside of China that will not be affected by the tariffs. You can ask your factory what their plan is and if they are expanding into other countries. If they are, this alternative could be a great way to avoid the additional tariff.

Continuing to buy raw materials from China, but assembling it elsewhere

Another option might be to purchase raw unfinished goods from China and then send those unfinished goods to another country to have the products assembled, then import them into the United States. In order to avoid the additional tariff, the other country needs to “substantially transform” the unfinished goods before export.  Whether the product has been substantially transformed is highly fact-specific and subjective and must completed with reasonable care.

Pre-buying inventory

Another option might be to pre-buy inventory before tariff increases take place. This will only be effective if your inventory is not seasonal and it doesn’t quickly become obsolete. However, in order to pre-buy the inventory, you need to have excess funds to pay for it. Additionally, there will be high storage fees and an increase in both, the working capital and inventory turnover ratios.

Bringing production back to the United States

Another option is bringing back production to the United States. However, before this can be done, a factory needs to be set up, workers hired and distribution channels established. After all this, if you need to bring in fabric, leather or other materials from China, you would still have to pay the tariff.

Section 321 de minimis value entry

Per Section 321, there is an exemption for goods valued under $800 to be allowed to enter duty free into the United States. That value is per day and per buyer. This option will only work for smaller companies that import less than $800 worth of goods per day.

Passing the increase in cost to your customers

There will have to be price increases, but where the costs fall will depend on how much more the consumer is willing to pay. With higher-end brands, because they also have high margins, the demand will not change much with price increases. However, lower margin products, may well see demand decrease in tandem with price increases. And, if your competitors aren’t similarly raising their prices, your customers will buy from them.

Decreasing expenses

In order to minimize price increases to the consumer and retain market competitiveness, companies will have to cut costs somewhere else. For example, negotiating for better factory prices or having factories pay a certain percentage of the tariff increase.

Are your goods classified correctly

If you already pay additional tariffs, make sure the classification used to import the products is correct. The current lists of products subject to additional tariffs are random. An item within one category of products can be on the list but another item within the same category may not be. In the past, it might not mattered which code you used but now you should re-check that you are using the correct code. This might save you money! Similarly, sometimes making a small change in product design can change the classification of the item and remove the additional duties. This can be done through internal analysis. However, if needed a specialist can also be hired.

Even though negotiations between President Donald Trump and President Xi Jinping started to try to reach an agreement on a fair trade, the future is still uncertain and you should have an alternative plan. Let’s all hope they reach an agreement and the trade war ends!