How to mitigate Section 301 duties

A KPMG trade analyst during a webinar outlined several measures companies subject to Section 301 duties might look into in order to remain competitive.    Among other things, companies should look to see whether they may change tariff classifications for accuracy, use foreign-trade zones (FTZs) and/or change country of origin based on bills of materials to limit exposure to tariffs, Irina Vaysfeld, a principal in KPMG’s Trade and Customs Practice, said during a Feb. 19 webinar.
   One success story that Vaysfeld reported is one company that was able to save itself from a costly manufacturing change through reclassifying a tariff code, allowing the firm to avoid the need to pay Section 301 duties on the good.
   “It would’ve been a [$15 million to $20 million] change, and as a result of looking at their classification, they actually had it classified incorrectly all of these years, and the correct classification was not on the 301 list,” Vaysfeld said. “Now that’s not going to happen in all cases, of course, but it is just a good step, to initially look at the classification.”
   One instance in which tariffs were reduced based on a slight product distinction may be found in a 2003 Court of International Trade case, Vaysfeld noted. That case found that X-Men action figures should be classified as non-doll toys (HTS Code 9503.49.00 with a 6.8 percent tariff) rather than dolls representing human beings (HTS Code 9502.10.40 with a 12 percent tariff).
Section 301 tariffs don’t apply to either product.
   Enacted Friday, the 2019 Consolidated Appropriations Act included an explanatory statement by the House Appropriations Committee instructing the Office of the U.S. Trade Representative by March 17 to expand its Section 301 exclusion process to goods on Tariff List 3, which includes 10 percent tariffs covering $200 billion worth of goods from China in annual import value.
   Baker & McKenzie customs lawyer Ted Murphy noted in a blog post that, based on the explanatory statement, USTR is clearly expected to establish a List 3 exclusion process.
   But USTR might interpret the instructions to mean that such an exclusion process must be implemented only if tariffs rise from 10 percent to 25 percent, as the instructions state that the process should follow the “same procedures” as Rounds 1 and 2, and that the process applies to products under “new Round 3 tariffs,” Murphy wrote.
   USTR has implemented exclusion processes for tariff lists 1 and 2, which includes 25 percent tariffs covering a combined $50 billion worth of goods from China.
   As the tariffs continue, it’s also worth it for companies to review their bills of materials to examine where the components come from and where manufacturing takes place, in case it’s possible to “change slightly to get a different country of origin,” Vaysfeld said.
   Companies also can consider whether to shift sourcing outside China, though that might be difficult and is more of a long-term strategy, she said.
   Another way for importers to potentially mitigate the impact of Section 301 tariffs is to use FTZs, which include benefits such as duty deferral, weekly entry and duty elimination on exports, which eliminates the need to file drawback, Vaysfeld said.
   “So while the 25 percent duty is not generally eliminated, at least you can have the cash flow for that period of time, while it’s in the zone,” she said.
   The webcast may be viewed here.