HKTDC outlines a shippers' guide on how to survive and thrive through a Sino-US trade war
 With the US ramping up trade tensions not just with mainland China, but also with many allies, the export environment has seldom seemed so formidable, says the Hong Kong Trade Development Council.
But there are customs strategies, international regulations and export options that should help shippers to ride out the storm, says the HKTDC. After imposing Section 232 tariffs of 25 per cent and 10 per cent on imports of steel and aluminum products, the US published two lists of goods produced in China that could be affected.
This followed a Section 301 investigation which ruled that China acts in ways that are unreasonable and discriminatory. Beijing reacted to the steel/ aluminium tariff increase by unveiling a list of 128 US products that now face higher duties of 15 per cent or 25 per cent.
In an interview with HKTDC economist Louis Chan, Sally Peng, Asia Pacific practice leader of Sandler, Travis & Rosenberg Limited, shared tips on how Hong Kong and mainland Chinese companies can make use of lesser used customs tools to overcome new hurdles.
"There are several things that companies can do," said Ms Peng. "First and foremost, they can try to get a company-specific exclusion from the tariffs, once the procedure for doing that has been set out and made clear. According to the US Department of Commerce, 42 exclusions from the steel tariffs had been granted. That covers seven different companies importing steel products from mainland China, Japan, Sweden, Belgium and Germany."
Manufacturers in Hong Kong and the mainland should see whether there is another potential classification for their product that might be more appropriate; or whether a slight modification could move it so it isn’t subject to the tariffs, a technique called “tariff engineering”
Companies adopting this tactic should always use the services of a qualified customs expert, one who thoroughly understands the US tariff classification requirements.
Thirdly, companies can use the rules of origin to shift the official origin of a product from Hong Kong or mainland China to a country which isn’t subject to the tariffs.
Although textile and clothing shipments to the US made on or after 2009 are no longer subject to any quotas, many may remember that the quotas for apparel goods resulted in this kind of “operational engineering” This can be applied to many other products.
There are certain manufacturing operations that make the good a product of the country in which that operation is performed. So companies can break down their manufacturing operations and move some of them elsewhere, legitimately using the rules of origin to save on tariffs.
This process may lead to operations moving to other production bases, such as ASEAN countries, although companies would also have to consider the impact of some crucial supply chain factors like differences in logistics and labour costs.
"If the tariffs can’t be partially or completely avoided by any of these means, then it’s worth considering trying to lower the price on which the tariffs are assessed. You can do this by using a middleman to buy your product and sell it on," said Ms Peng.
That middleman, she said, can legitimately be the same company as long as the arrangement is properly set up according to the “First Sale Rule” or FSR. This was first established by the US courts in 1988. It allows US buyers to lower duty-paid costs without cutting the profit margins of their offshore suppliers.
All imports into the US are subject to what’s called appraisement. The preferred way of doing this is to calculate the transaction value - that is, "the price actually paid or payable for the merchandise when sold for export to the US", plus certain additions.
When it’s agreed that the transaction value is unacceptable, the importer can enter its merchandise under one of the other statutory appraisement methods: the transaction value of identical or similar merchandise; the deductive value; the computed value; or, if none of these applies, a method of valuation similar to one of these.
Most goods imported into the US from Asia are appraised according to transaction value, which is the invoice price between the seller (either a middleman or trading company, or the factory) and the importer.
Import duties are then assessed on the appraised value of the goods. For example, in a traditional three-tiered transaction, a US customer will issue a purchase order to a vendor for a certain quantity of goods at an established price, say US$10,000.
The middleman or trading company will buy these goods from a manufacturer for a lower price, say $7,000. The vendor's profit is $3,000 on the transaction. An invoice for $10,000 will be issued by the vendor to the US customer. This invoice is presented to the US Customs when the goods are imported and the customer pays duty based on the value of the goods as reflected in this invoice. If the tariff level is 25 per cent, as in the case of the section 301 tariffs, that’s $2,500.
Now consider this transaction using the FSR. The invoicing and payment stay the same, but now it’s the invoice between the middleman or trading company and the factory that is presented to custom for appraisement and calculating the duty to be paid. The US buyer in this case pays just $1,750, rather than $2,500. The middleman's price and profit margin haven’t changed, but the US buyer gets a substantial reduction in its duty-paid costs.
The practical considerations involved in using the FSR can make it seem daunting and even prohibitive at first. But with careful planning and the proper documents, it is possible to set it up in a way that satisfies the US government. To show that the price of the first sale price is accurate, the middleman, the factory, and the US buyer must be prepared to present documents including:
Purchase orders with copies of terms between all parties; confirmations; invoices; written contracts or sales agreements; bills of lading for the final products and materials; proof of payment, such as letters of credit; production orders and/or manufacturing instructions and other unique specifications of the merchandise to conform to the buyer's standards; examples of labels, logos, stock numbers, bar codes, and other unique merchandise or carton marks and examples of country of origin marking on finished goods, hang tags, and so on.
In cases in which the middleman and the factory are linked, the books and records of both businesses might need to be reviewed, to make sure that the transaction is at "arm's length" - that is, that the relationship didn’t affect the purchase price of the goods.
While it might seem that a relationship between the middleman and the factory would make it difficult to prove to the US government that an FSV was legitimate, it can actually provide an opportunity for the US buyer to make additional savings.
US Customs allows certain expenses unrelated to the production of the goods to be shifted from the books of the manufacturer to those of a related middleman. This means the First Sale price can be cut even further.
Sometimes a manufacturer can be reluctant to reveal what the “First Sale” price is, and that can be a very real obstacle when trying to implement an FSR. It might be possible to use a law firm to ensure that sensitive information can be shielded.
So it’s important, when setting up proper First Sale programmes, to take proactive steps to make sure that multi-tiered transactions meet the FSR requirements. It’s also important that there are internal controls and procedures in place to have the documents to show that you are in compliance with the rules, if and when customs comes knocking.
Because the information is often kept by different partners in the supply chain, it is particularly important for importers to tell their partners what their responsibilities are for keeping and producing records. If you fail to meet the FSR requirements, that may be considered a lack of reasonable care, and could lead to you facing penalties. It’s essential you get experts in the field to make a careful review of documentation flow if you’re going to ensure that the information presented to customs is accurate and substantiated. |
