Way back on August 17, 2017, President Trump issued a Memorandum to the U.S. Trade Representative (USTR) with instructions to conduct an investigation into the Chinese government and its activities related to U.S. intellectual property, technology transfer and innovation. Referred to the, “Trump Tariffs”, China was found to be in violation of trade rules and on July 6, 2018, the first of four Product Lists became subject to an additional 25% import tariff.
Since that time, U.S. importers have devised both short and long-term strategies to either mitigate, or totally avoid what are technically known as the, “Section 301 Tariffs”. The first option was for companies to engage in the USTR’s Product Exclusion Process, through which a company could submit an “Exclusion Request” to seek an exemption from the tariffs. Very limited in scope, the import community quickly discovered that it would have to find other ways to neutralize the impact of the Trump Tariffs.
In the short term, most importers approached their Chinese suppliers and asked them to “take a haircut” by reducing the unit price of their products. From there, companies either absorbed the expense in the form of lower profits, or passed at least part of the additional expense on to their customers. For the long haul, many importers began the process of shifting their sourcing activities away from China to countries in Southeast Asia, or to nations that have Free Trade Agreements with the U.S., such as Mexico.
How much longer?
Fast forward to 2021 and trade statistics from the U.S. Census Bureau clearly indicate that the Section 301 Tariffs have done little to dissuade importers from sourcing in China. With some exceptions caused by the decrease in trade during the first months of the Pandemic, the U.S. trade deficit with China has average $30 billion per month for well over a decade.
While certainly burdensome, the pain of the Section 301 Tariffs were made worse by the supply chain disruptions born of COVID-19 and the subsequent ten-fold increase in ocean freight rates from Asia to the U.S. Add to that problem the across-the-board increases in logistics services such as port drayage, trans-load and trucking, and many importers are facing a threat to their very existence.
With U.S.-China trade as brisk as ever and most avenues for tariff mitigation exhausted, the question for U.S. importers is “How much longer will the Trump Tariffs remain in effect”? Unfortunately, the answer to that question is two-fold and neither response bodes well for revocation of Section 301. Although purely the opinion of the author of this blog, the reader can decide whether or not the real reasons for keeping the tariffs in place make sense.
First off, the Section 301 Tariffs have generated billions in additional revenue for the U.S. Treasury in the form of customs duties paid by importers. Bearing in mind that the U.S.’s debt burden was already high and that the government doled out billions more to help Americans throughout COVID-19, the Federal government finds itself in a precarious financial situation. In other words, the U.S. Treasury needs every penny it can get its hands on and for that reason alone, it’s unlikely that the Trump Tariffs will be repealed.
The second reason is more political, but equally potent. Basically, if the Biden Administration lifts the Trump Tariffs, it will be viewed as “weak on China” or “China sympathizers” by the opposition, and the fallout would be quite negative. Given China’s geo-political aspirations and ongoing political division here in the States, the optics associated with lifting the Section 301 Tariffs are such that there is no real political upside to lifting them.
Mitigating the Trump tariffs through duty drawback.
So, with most options already exhausted, what else can U.S. importers do to alleviate the burden of the Section 301 Tariffs? Well, if an importer finds itself in the enviable position of also being an exporter, they can recover 99% of the duties paid on imported merchandise when those goods are exported. Although drawback is applicable to merchandise imported from any country, it is especially attractive for firms that source in China, pay the Section 301 tariffs and then export those products to another country.
One very attractive feature of duty drawback is that there are several regimens under which an exporter in the U.S. can qualify for the program. Equally applicable to the importation of finished goods as they are to raw materials that become part of another item, here’s a quick list of the various duty drawback scenarios:
Unused Merchandise Direct Identification Drawback: This is for products that are imported into the United States that are not altered in any way and that are subsequently exported
Unused Merchandise Substitution Drawback: When domestically sourced goods are interchangeable with imported goods and an export occurs, duties can be recovered on imported goods even if they aren’t the ones being exported
Manufacturing Direct Identification Drawback: This is for manufacturers that can directly identify imported raw materials that go into a production process for a new product that is subsequently exported
Manufacturing Substitution Drawback: When both domestic and internationally sourced raw materials are used interchangeably in a production process that result in an export, the duties on the imported material can be recovered even if they are not the material being exported
Rejected Merchandise Drawback: If goods are imported and merchandise is rejected (returned to origin or destroyed under U.S. CBP supervision), the filer can recover 99% of the duties paid
Drawback is great, but it’s not as easy as it sounds.
Over the years, duty drawback has proven to be invaluable to thousands of U.S. importers and exporters. With that said, U.S. Customs & Border Protection has strict rules in place that require the “filer” to essentially prove that a) an import took place and duties were paid b) the imported goods were received into an inventory management system and that c) goods were removed from inventory upon receipt of an international sales order and an export took place.
Regardless of the type of drawback filed, the process of meeting U.S. CBP’s standards has historically been an extremely manual and labor intensive undertaking. Essentially an amalgamation of Excel spread sheets and disjointed reports, drawback filers of all types find themselves unable to maximize their drawback claims due to a combination of time, manpower and administrative constraints.
So, whereas duty drawback is a great way to mitigate the impact of the Section 301 Tariffs, companies have to be prepared to comply with the regulations that U.S. CBP has in place for this program. Luckily, 3rdwave has created a fully automated software tool that helps companies “mine, align and refine” the data they need to successfully file drawback claims. Designed for all types of drawback, the 3rdwave platform exists to not only help companies to organize the data they need, but to do so in a way that maximizes the value of their claims while remaining compliant with all U.S. CBP regulations.
3rdwave Duty Drawback is a cloud-based SaaS solution that empowers claimants to capture every penny of drawback that they are eligible for while minimizing the amount of time required to create drawback claims. We partner with drawback brokers to make the process more efficient, resulting in less work for the claimant and broker, decreased broker fees, and maximized drawback recovery. This is all accomplished with 3rdwave’s IT-light solution, accompanied with a value-add onboarding service, and based on a success fee for each claim. To learn more about 3rdwave Duty Drawback, click here.