The nominated US Trade Representative Katherine Tai is known to be
tough on China. Tariffs are likely to remain for some time. In this
QAD Precision Report, we look at how the incoming administration is
likely to respond to China and suggest tariff mitigation strategies.
In early December, US President-elect Joe Biden announced Katherine
Tai as his pick for the new administration’s US Trade Representative.
If confirmed, Ms Tai, a senior trade lawyer with the House Ways and
Means Committee, will replace Robert Lighthizer as the US’s chief
Ms Tai will be the first woman of color to hold this position. Her
parents were born in China, lived in Taiwan and immigrated to
the US before she was born.
What does this mean for US trade relations with China?
For observers outside the United States, the two main political
parties can appear to be split by deep ideological differences. But
that is not always the case. Although their approaches are likely to
be different, Ms Tai and Mr Lighthizer share an important similarity —
they are both “tough on China.”
Tariffs and Trade Deals
While Robert Lighthizer favored tariffs to bring China to the
negotiating table, Katherine Tai has previously used a multilateral
approach to achieve her aims. She has a history of successfully
litigating disputes against China at the World Trade
Organization — often with partners including the European Union, Japan
Ms Tai has stated that China should be addressed forcefully
and strategically. Her stance is unlikely to change if confirmed
as US Trade Representative.
Furthermore, President-elect Biden has clearly stated that he has no
plans to roll back tariffs on Chinese imports. Likewise, the incoming
President will not undo the Phase 1 trade deal with China signed by
the Trump administration.
“I’m not going to make any immediate moves, and the same applies to
the tariffs,” Mr Biden told New York Times columnist Thomas
L. Friedman. “I’m not going to prejudice my options.”
Multilateral Approaches and National Interest
In his New York Times interview, Mr Biden stated his belief
that the best strategy for dealing with China would be one that gets
the US and its allies “on the same page.” This is in contrast to Mr
Trump, who favored using the US’s might to go it alone.
However, Mr Biden, like the outgoing President, both believe in
prioritizing US interests. The President-elect told the New York
Times that he intends to stave off Chinese competition by
investing in American infrastructure and industry.
“I want to make sure we’re going to fight like hell by investing in
America first,” he said. Areas under consideration include artificial
intelligence, advanced material technology, biotechnology and energy.
And if anyone thinks a US-UK trade deal will be on the cards any time
soon, they are likely to be mistaken. Mr Biden stated that it is not
his intention to enter into any new trade agreements until the US has
first invested domestically.
The US, the EU and China
One ally may be less amenable now than in the past — the European Union.
The EU, like the US, has in recent years pushed back against
competition from China. In late 2018, EU member states agreed to protect
critical infrastructure and strategic technologies. Although the
agreement did not mention Beijing specifically, it does mention
screening infrastructure from investments by stated-owned companies,
and protecting IP from technology transfers.
Despite this, on 30 December 2020, the EU and China came to terms for
Agreement on Investment (CAI). Under the terms of the agreement,
China will offer greater market access to EU investment, forbid the
forced transfer of technologies, and has made commitments on forced
labor and sustainability.
While this may be good news for EU companies, the agreement is
unlikely to be popular in Washington. A former official in the Obama
administration called the deal “a setback.”
The EU views this differently. In an interview with the Financial
Times, EU trade commissioner, Valdis Dombrovskis, likened the
agreement to the Phase 1 deal signed between the US and China last
January. He sees the CAI as a “levelling up” between the EU and the US
with regards to market access to China.
Despite the historic nature of the agreement, the EU may find it
difficult to enforce many of these commitments. To do so, the EU is
likely to need allies — in particular the US.
Tariff Mitigation Strategies
It seems clear that economic relations between Washington and Beijing
are not likely to change any time soon. In other words, companies
should assume that Section 301 tariffs on Chinese imports will remain
in place for the foreseeable future. Therefore, businesses should
continue any tariff mitigation strategies they have already
implemented, or consider doing so.
“The mitigation strategies for avoiding/minimizing import duty starts
first with taking the time to fully understand all of the risks
associated with the supplier and the country of origin,” explains
Jerry Peck, QAD Precision's VP of Product Strategy.
“This becomes especially important for strategic goods where the
golden rule is to never single-source these goods. Unfortunately, too
many companies do not perform any risk mitigation due diligence up
front and are then left scrambling to implement cost control
strategies after the fact. With the additional Chinese tariffs, for
example, these strategies predominately equated to the use of Foreign
Trade Zones and/or Duty Drawback.”
Here we look at FTZs and Duty Drawback as well as some other tariff
FOREIGN TRADE ZONES
Importers using Foreign Trade Zones (FTZs) can defer duties and
tariff payments until their goods move into the US. If goods are
exported directly from an FTZ, then tariffs may be avoided.
Furthermore, goods can be stored duty free in an FTZ.
Companies can use duty drawbacks to request refunds from Customs.
Customs will refund up to 99 percent of the duties if imported
merchandise is either exported or destroyed. Companies have up to five
years from the date of importation to claim a drawback, and within
three years of the date of export.
COUNTRY OF ORIGIN CHANGES
Some companies have mitigated the impact of tariffs by moving some of
their manufacturing operations outside of China. Done correctly, this
can result in country of origin changes.
However, this must be done in accordance with the letter and spirit
of the law. All declarations must be accurate. This is particularly
important when finished goods are produced using parts sourced from
Customs and Border Protection is likely to keep a close eye on
importers to ensure that they are complying with the law. Subverting
tariffs by incorrectly stating the country of origin of imported goods
Companies can apply to the US Trade Representative for exclusions
from tariffs. This is a lengthy process and not guaranteed. Companies
will need documented proof that an exclusion is warranted. This could
be that the products they are sourcing are not available elsewhere or
the tariffs are causing irreparable damage to their industry.
Should your imports not qualify for tariffs exclusions, finding
alternative suppliers is another option. This does not only apply to
tariffs on Chinese goods. As disruption caused by the Covid-19
pandemic has shown, sourcing from a single supplier is a risky strategy.
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THE EU, THE UK AND POST-BREXIT PARCEL SHIPPING
MANAGEMENT: THE IMPORTANCE OF CORRECT CLASSIFICATION
OF ORIGIN: FTA ORIGIN VS COUNTRY OF ORIGIN