China tar­iffs uncer­tain­ties chok­ing firms

Some look­ing to re­lo­cate as only way to avoid levies

Arkansas Democrat-Gazette - - BUSINESS & FARM - MARK NIQUETTE AND AN­DREW MAYEDA

Paul Shekoski is not sit­ting idly by wait­ing for the U.S.-China trade war to end.

Shekoski’s com­pany re­lies on im­ports of weather-mon­i­tor­ing de­vices it has made in China. But last year, it paid more in du­ties than it made in profit be­cause of Pres­i­dent Don­ald Trump’s tar­iffs. Now he’s ex­am­in­ing ev­ery le­gal op­tion to avoid the du­ties — in­clud­ing re­lo­cat­ing his pro­duc­tion to Mex­ico.

“It has the po­ten­tial of putting us out of busi­ness if we don’t do any­thing,” Shekoski, chief ex­ec­u­tive of Primex Fam­ily of Cos. in Wis­con­sin, said by phone from Hong Kong, where he was in­ves­ti­gat­ing po­ten­tial changes in his Chi­nese sup­ply chain.

Primex isn’t alone in ex­plor­ing the lost art of avoid­ing U.S. tar­iffs, es­pe­cially af­ter Trump fo­cused on China for what he calls un­fair trade prac­tices.

The pres­i­dent’s du­ties on $250 bil­lion of Chi­nese goods — with an in­crease in tar­iffs to come un­less a trade deal with Bei­jing is reached by March 1 — have af­fected U.S. com­pa­nies big and small.

Ap­ple Inc. low­ered its first-quar­ter out­look af­ter de­mand for the iPhone in China slowed more sharply than ex­pected, and the com­pany’s sup­pli­ers in China are con­sid­er­ing shift­ing pro­duc­tion.

“The gen­eral thing we’re hear­ing is the frus­tra­tion at the lack of cer­tainty. That’s what’s caus­ing the most anx­i­ety,” said Stephen Orava, a trade lawyer at King & Spald­ing LLP.

U.S. Trade Rep­re­sen­ta­tive Robert Lighthizer and Trea­sury Sec­re­tary Steve Mnuchin are lead­ing a del­e­ga­tion to Bei­jing this week for the next round of trade talks be­fore the March 1 dead­line. If no deal is reached, the U.S. will in­crease tar­iffs on $200 bil­lion of Chi­nese goods.

“Will they bring home the ba­con? I don’t know,” White House eco­nomic ad­viser Larry Kud­low told re­porters at the White House re­cently.

For com­pa­nies caught in the trade war, the op­tions for mit­i­gat­ing ex­po­sure to tar­iffs range from a sim­ple change in pa­per­work to cre­ative “tar­iff en­gi­neer­ing” and the over­haul of sup­ply chains of­ten de­vel­oped over decades. It’s forced some ex­ec­u­tives to con­sider how far they can push the le­gal bound­aries to avoid pay­ing tar­iffs of as much as 25 per­cent.

“It would al­most be some­thing that would be a fir­ing of­fense if you’re in charge of sup­ply-chain man­age­ment and you don’t point out to some­one that you could save 25 per­cent tar­iffs,” said Amanda DeBusk, a for­mer Com­merce ex­port en­force­ment of­fi­cial who now is chair­man of Dechert LLP’s in­ter­na­tional trade prac­tice.

Primex has al­ready tried some first steps that com­pa­nies of­ten take to mit­i­gate the tar­iffs: try­ing to pass on the added costs and check­ing if their prod­ucts were prop­erly clas­si­fied un­der U.S. tar­iff codes. Some items in­cor­rectly cat­e­go­rized in the past went un­no­ticed be­cause no du­ties were ap­plied, said Randy Rucker, a trade lawyer rep­re­sent­ing Primex.

The com­pany also filed 79 re­quests with the trade rep­re­sen­ta­tive’s of­fice for ex­clu­sions from the tar­iffs. De­ci­sions are based on whether a prod­uct is avail­able only from China, if du­ties “would cause se­vere eco­nomic harm” to the com­pany

or U.S. in­ter­ests, and whether the item is strate­gi­cally im­por­tant. All of Primex’s re­quests were de­nied.

“We were like, ‘You’re about to put a 75-year-old com­pany out of busi­ness?”’ Shekoski said. “Why would it not be eco­nomic harm?”

Other op­tions for avoid­ing du­ties in­volve “tar­iff en­gi­neer­ing.” That means al­ter­ing the pro­duc­tion of a prod­uct to meet the def­i­ni­tion of “sub­stan­tial trans­for­ma­tion” so its “coun­try of ori­gin” can be changed, or mod­i­fy­ing the prod­uct so it falls un­der a dif­fer­ent im­port clas­si­fi­ca­tion with­out tar­iffs.

The U.S. Cus­toms and Bor­der Pro­tec­tion agency po­lices any fraud­u­lent ac­tiv­ity, and com­pa­nies are “fig­ur­ing out how com­fort­able they are in push­ing that line and get­ting as close to that line as pos­si­ble,” said Melissa Duffy, an in­ter­na­tional Some trade com­pa­nies lawyer at are Dechert. look­ing at slightly al­ter­ing their prod­ucts to avoid tar­iffs. But Primex doesn’t have the abil­ity to change its prod­ucts and is ex­plor­ing whether its plas­tic in­jec­tion mold­ing process can be moved out of China to change the coun­try of ori­gin, Shekoski said. The best long-term op­tion may be mov­ing pro­duc­tion to Mex­ico, which would shorten the sup­ply chain but also take about two years at a cost of about $5 mil­lion, he said.

An­other op­tion for avoid­ing tar­iffs that’s not avail­able to Primex is to cre­ate or ex­pand a for­eign free-trade zone or en­roll in the fed­eral du­ty­draw­back pro­gram. That al­lows re­funds of du­ties paid on im­ported Chi­nese goods if they are later ex­ported as a com­pa­ra­ble prod­uct.

“Com­pa­nies are look­ing at ev­ery sin­gle way that is avail­able to them, and what they are find­ing is that it takes a patch­work of so­lu­tions,” DeBusk said. “There’s no sil­ver bul­let.”

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