Importers Seen Finding Success Mitigating Tariffs Through Valuation Changes
Sourcing goods from alternative countries of origin to escape Section 301 tariffs on Chinese imports can be difficult or time-consuming, so companies increasingly are turning to other ways to mitigate the duties, said experts at a Georgetown Law workshop last week on international trade. More importers seeking to lower their exposure to the tariffs are finding that making changes in customs valuation of their goods can deliver the best bang for the buck, said Lynlee Brown, a senior manager at Ernst & Young.
It can take only a few weeks for a company to restructure its supply chain to take advantage of the first-sale principle, said Brown. That’s when an importer can declare the customs value of the goods it sources from China to be based on the transaction between the factory and a middleman, instead of between the middleman and the importer.
The benefit to importers that declare first-sale valuation is a duty owed based on a lower markup between factory and vendor, said Brown. The risk will be closer scrutiny from Customs and Border Protection, which will enforce the legitimacy of first-sale valuations and the importer’s interactions with others in the supply chain, she said. "Related party analysis, that’s always going to be a risk." Relying on normal industry best practices likely will yield the best chance of success, she said.
The auto industry lacks the IP leverage the tech industry has, so it's increasingly using bonded warehouses and foreign-trade zones to mitigate the Section 301 tariffs, said Steven Gardon, vice president-global indirect taxes and customs at Lear Corp., a Tier 1 auto parts supplier. That’s a strategy that allows companies to escape duties for as long as the imported goods don’t arrive at U.S. ports. Importers also are increasingly shipping Chinese goods to plants in Mexico and Canada, where products can then be shipped to the U.S. duty-free under the NAFTA 2.0 free-trade agreement, said Gardon.
Gardon doubts that even if the U.S. strikes a trade deal with China soon, things return to the way they were before the tariffs: “It’s going to be a challenging environment for a very long time."
The tariffs caused “a permanent change to the attractiveness of sourcing from China," said Gardon. Lear didn’t seriously consider sourcing goods from outside China because of the “long timeline” needed to “get a new plant certified and able to supply” to customers’ expectations, he said. “Even if you have an existing plant in another country, even to get additional production," it would take 18 months to two years to get that factory online, he said.