December 1, 2022 - Following the G20 summit in Bali on Nov. 14, 2022, President Joe Biden reported that a new cold war with China can be avoided. This is certainly welcome news to global businesses, but day-to-day businesses continue to struggle with the chaos of unprecedented international trade regulations that have taken hold in the past six years.
The Trump-era China tariffs, the Ukraine/Russia related sanctions, as well as other trade restrictions challenge U.S. companies with an international reach as they navigate a tumultuous geopolitical scene. It is also important to note the lasting impact of the U.S. withdrawal from the Trans-Pacific Partnership Agreement (TPP), which would have included 12 Pacific Rim economies. The agreement has moved forward without the U.S. as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, or TPP11).
So, amidst this global unrest, what are U.S. companies really struggling with today when it comes to international trade? It's understanding and navigating the technicalities. Below, we examine some of the major international trade issues facing U.S. companies.
China
As U.S. importers are aware, the China Section 301 tariffs impact certain products for certain periods of time, depending on the product's applicable classification under the Harmonized Tariff Schedule (HTS). Having an incorrect HTS classification can result in penalties and interest, with fees. If the Section 301 tariffs apply to a given product by HTS code, the importer must pay an additional 10-25% tariff to the U.S. Government to import the merchandise.
As outside trade counsel looking in, we see first-hand through company sales data that many U.S. businesses cannot shoulder this additional burden. Some companies have shifted production to Mexico, where they may take advantage of the U.S.-Mexico-Canada Agreement (USMCA) as long as they meet the technical requirements for originating products.
For others, China is the only feasible country from which to source a particular commodity — for example, due to limited product availability or the difficulty of relocation of manufacturing plants. Importers were allowed to request exclusions during specific windows of time, and such requests frequently involved proving severe economic harm to the U.S. requestor.
Exclusions were granted for certain products, again for certain periods of time. The U.S. Trade Representative (USTR) extended 352 of 549 total eligible exclusions in March 2022 that were valid from Oct. 12, 2021, to Dec. 31, 2022. In addition, on May 27, 2022, the USTR extended 81 product-specific exclusions for COVID-related products. These exclusions are set to expire on Dec. 1, 2022, so importers are watching for new developments.
USTR began a four-year review of Section 301 actions taken on May 3, 2022, but that review will take time. Congress also instructed the ITC to gather public comments on Section 301 economic impacts, but that report is not due to Congress until 2023. Much is up in the air.
For assistance or questions with the four-year review or exclusion process, the USTR has a hotline for Section 301 at (202) 395-5725.
In addition to the tariffs, compliance teams are working to document compliance with the Uyghur Forced Labor Prevention Act (UFLPA), which involves a rebuttable presumption that the importation of certain goods from China is prohibited.
Add to that the complexity of denied party screening of entities that are state controlled even if they are not state OWNED per se. Tracking that ownership back is extremely difficult, and companies do not know how deep to dig in the due diligence process.
Mexico
The USMCA went into effect July 1, 2020, keeping in place the detailed content analysis required to substantiate country of origin product-by-product. To qualify for preferential tariff treatment, products must contain a minimum amount of North American content. Whether an import qualifies as originating depends on the percentage of content from the region or a substantial transformation within a USMCA country (e.g., a change in the essential character of the item as specified in the tariff code). Despite several updates in 2020, substantiating country of origin remains a technical and detailed process. The USMCA also adds new twists to the origin analysis of certain imports such as vehicles.
For example, the article, "USMCA — Impact on the Automotive Industry," by The Descartes Systems Group, a trade software service provider, notes significant changes to the automotive industry.
"To qualify for tariff-free entry, automakers must use an increased minimum of North America-made parts, from 62.5 percent from NAFTA to 75 percent. Additionally, increased worker compensation is now required." Specifically impacting manufacturers in Mexico, which under NAFTA saw wages accounting for one-eighth of costs, USMCA provisions now require companies "to produce 40-45 percent of their parts from factories paying an average wage of $16 USD per hour."
Russia
The Ukraine/Russia-related sanctions are not comprehensive. Rather than covering the entire country, the U.S. Department of Treasury Office of Foreign Assets Control (OFAC) has designed these sanctions to target specific entities and individuals. In our practical experience, targeted, complex sanctions regimes such as the Russia sanctions can give companies false hope.
On its face, a proposed transaction may not appear to violate U.S. sanctions on Russia. In practice, however, transactions can wind up prohibited due to tangential aspects of the deal. Among other verifications needed to ensure a transaction is legal, vetting Russian entities requires knowing precisely how the ownership of an entity is structured and who the owners are. Corporate documents generally are not publicly available for China and Russia. Even if a proposed transaction passes screening initially, the bank or banks involved may be blocked so the seller cannot get paid.
Conclusion
Lingering COVID-19 supply chain issues and dynamic international relations have led to stricter regulatory controls in the U.S. Not only are certain imported goods subject to significant tariffs, but transportation and logistics are also more expensive because of supply chain shortages. As companies strive to expand, are they growing their trade compliance programs?
The past six years have culminated in an extraordinary administrative burden on corporate trade compliance teams. And growth will not stop anytime soon. To grow in a healthy way, leading companies are reevaluating the regulatory landscape and scaling up trade compliance programs to meet demands in the coming year.