Are tariff relief options stacked against small business?

By Shrey Agarwal and Maddy Scannell
Research Interns, McNair Center for Entrepreneurship and Economic Growth 

 

On September 20, 2019, the Office of the United States Trade Representative (USTR) released a list of hundreds of products exempted from the recent tariffs the United States imposed on Chinese goods.[1] Due to the ongoing trade war, many businesses are facing uncertainty in supply chains, prompting a flurry of exemption requests and other relief efforts.  With tariff hikes taking effect in October and December on as much as $550 billion worth of Chinese goods,[2] examining these requests, as well as other strategies that businesses employ to survive the trade war, is timely.

Exemption requests

Companies and trade groups may submit a request to the USTR asking that particular products be excluded from the announced tariffs.  Factors considered in evaluating the exclusion request include whether the product is available from countries other than China, whether duties will cause severe economic harm to the applicant or to other American interests, and whether the product is strategically important or related to China’s industrial programs.  In addition to these considerations, the applicant must provide details about the value and quantity of the product purchased from China since 2017, product substitutability, the company’s quarterly revenues, and percentage of sales attributed to Chinese-origin goods.[4] Anesthesia masks, various compressors and pumps, and swimming pool vacuum cleaner parts are among the products that have been granted exemptions by the USTR.[5]

One of the best-known companies to take advantage of the exemption process is Apple, which filed a highly publicized request for tariff exemptions on a number of Chinese-made components of its MacBook Pro computers in order to keep final assembly of the computers in Austin, Texas.  After the Trump administration initially indicated that it would deny the request, Apple threatened to shift the entirety of MacBook Pro manufacturing to China.  With this threat, Apple was able to win tariff exemptions from the USTR for ten critical parts.[6]

Another company taking advantage of the exemption process is Arrowhead Engineered Products, a 1000-employee firm in Blaine, Minnesota, that imports aftermarket repair parts from China for cars, lawn mowers, and other vehicles.  Most of Arrowhead’s product line is now subject to a 25% tariff.  In response, the company has filed over 10,000 exemption requests, more than any other company to date.  After Arrowhead’s local congressman, Representative Tom Emmer, advised the company to “be specific” with relief requests, the company hired a staff of temporary workers to file exemption requests for every single manufacturing part.[7]

Section 321 entry

An additional legal tool that companies seek to employ is Section 321 “de minimis value” entry, which renders individual shipments under $800 tariff-exempt.  The limit was $200 until February 2016, when it was quadrupled in an effort to to encourage trade.[8] For some enterprises, Section 321 entry “offers a viable option to circumnavigate the trade war between China and the U.S.,” observes Tony Leach, a global supply chain director at James Cargo Fulfilment.[9] For example, larger retailers will consult with middlemen to apply a method called “drop shipping,” which allows a retailer to ship using the Section 321 tariff exclusion without ever touching the physical product before it reaches the end customer.  For larger companies, Leach has utilized an online solution that allows them to use a customs broker in the U.S. and repackage the product for the end consumer without the retailer ever getting involved.  Although Section 321 entry is ostensibly intended for the benefit of small or occasional importers, the companies best able to use this tactic on a large scale may be those that have sophisticated distribution systems and can exert strong control over distribution channels.

Other relief tactics

Beyond the exploitation of Section 321, a number of other solutions have also arisen to circumvent the tariff hikes.[10] One of these methods, first-sale valuation, has become increasingly popular as tariffs have risen. Companies petition U.S. Customs to levy a lower valuation on goods based on prices along the supply chain, rather than the manufacturing cost.  Along with lowering the levy valuations, manufacturers may also employ “origin engineering” (also called “tariff engineering”), in which components of an end product are sourced through countries subject to lower tariffs than China.[11] This strategy allows the importer to claim manufacturer origin in those countries, while citing China as the location of only “material transformation,” where the end product is assembled.  The USTR may make tariff exceptions for such products on the basis that their integral components originate outside of China.

Disparate impact on small business?

For small business advocates, the myriad of relief options naturally raises the question: are the various tactics for avoiding tariffs really accessible to small firms?   As the trade war with China has forced companies to work around tariffs, it seems likely that large companies may be more able to successfully navigate the trade war.  Options available to larger companies include exerting political pressure by threatening to move manufacturing overseas, hiring attorneys and consultants to pursue exemptions, and manipulating supply chains to take advantage of other loopholes.  Small businesses may lack the economic and political clout, cash reserve, or global connections to employ these same tools.  Thus, though the stated policy of recent tariffs is to protect American business, small businesses may be at a relative disadvantage.

 

References

[1]Office of the United States Trade Representative, “$34 Billion Exclusions Granted September” (Federal Register, September 20, 2019), https://ustr.gov/sites/default/files/enforcement/301Investigations/%2434_Billion_Exclusions_Granted_September.pdf.

[2]Doug Palmer, “Hundreds of Chinese Goods Exempted from Trump’s Tariffs,” POLITICO, September 19, 2019, https://politi.co/2IeLj9r.

[3]“About Us,” Office of the United States Trade Representative, accessed October 16, 2019, https://ustr.gov/about-us.

[4]Office of the United States Trade Representative, “Procedures for Requests to Exclude Particular Products from the September 2018 Action” (Federal Register, June 24, 2019), https://ustr.gov/sites/default/files/enforcement/301Investigations/Procedures_for_Requests_to_Exclude_Particular_Products_from_the_September_2018_Action.pdf.

[5]  Office of the United States Trade Representative, “Notice of Product Exclusions: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation,” September 20, 2019, https://www.federalregister.gov/documents/2019/09/20/2019-20441/notice-of-product-exclusions-chinas-acts-policies-and-practices-related-to-technology-transfer.

[6]Tripp Mickle and Sarah E. Needleman, “Apple to Keep Building Mac Pro in U.S. After Securing Tariff Relief,” Wall Street Journal, September 23, 2019, sec. Tech, https://www.wsj.com/articles/apple-to-keep-building-mac-pro-in-u-s-after-securing-tariff-relief-11569257615.

[7]Josh Zumbrun, Anthony DeBarros and Chad Day, “At 10,000 and Counting, This Company Is Flooding the U.S. With Tariff Appeals,” Wall Street Journal, September 22, 2019, sec. US, https://www.wsj.com/articles/at-10-000-and-counting-this-company-is-flooding-the-u-s-with-tariff-appeals-11569144600.

[8]Brianna Leininger, “What You Need To Know About The Section 321 De Minimis Value Entry,” Pacific Customs Brokers, Sept 26, 2019, https://www.pcb.ca/post/section-321-de-minimis-value-entry-8304. The formal statutory provision is Section 321(a)(2)(C) of the Tariff Act of 1930 (as amended), codified at 19 U.S. Code 1321(a)(2)(C).

[9] “China-based firms look to obscure tariff loophole to dodge trade war, but US customs is cracking down,” South China Morning Post, August 23, 2019, https://www.scmp.com/economy/china-economy/article/3024108/china-based-firms-look-obscure-tariff-loophole-dodge-trade.

[10]U.S. International Trade Commission, Use of the “First Sale Rule” for Customs Valuation of U.S. Imports, Investigation No. 332-505, Publication 4121, Dec. 2009, https://www.usitc.gov/publications/332/pub4121.pdf; see also Andrew Edgecliffe-Johnson and Alistair Gray, “US Companies Hunt for Loopholes to Beat China Tariffs,” Financial Times, June 24, 2019, https://www.ft.com/content/5cd049c0-9467-11e9-b7ea-60e35ef678d2.

[11]Transport Topics, “In Times of Trade War, Companies Get Creative to Avoid Tariffs,” August 10, 2018,  https://www.ttnews.com/articles/times-trade-war-companies-get-creative-avoid-tariffs.