Industry Week 8/7/19 | Ready for the Sept 1 Tariffs? Here's a Game Plan
Last week, President Trump announced another wave of Section 301 tariff increases that will cover an additional $300B in goods from China. The additional 10% levy is planned to take effect on September 1. Given the short timing, importers for whom the new tariffs have a material impact should take action now. Here’s a game plan to minimize the potential impact to your business.
1. Determine the impact
When first announced in the Federal Register in May, the proposed action included 3,805 tariff subheadings covering almost every imported item that was not already subject to a tariff increase. Since then, the office of the U.S. Trade Representative has held public hearings and received written comments from industry representatives. After review, some commodities may be exempted from the increased duties. However, if your products were listed in the USTR proposal in May, the odds are that the additional duty will be applied starting on Sept. 1.
The extra duty to be paid will be the 10% duty rate applied against your product’s FOB (Free of Board) value. FOB value is the value of your goods excluding the cost of international freight and transport insurance.
Quantify the additional expense your company will incur and evaluate the impact to your business. This is the worst-case scenario that your company will face.
2. Create your immediate transportation plan
Cargo cleared through U.S. Customs before September 1 won’t be affected by the increase. To meet this deadline, you need to meet two conditions: Your broker’s customs entry needs to be successfully filed prior to September 1, and the vessel carrying your goods must have arrived at a U.S. port before September 1.
Ensure that all cargo ready for shipment, or that can be made ready for shipment, is booked to arrive on time. The last vessels sailing from Shanghai that are scheduled to meet the deadline are:
M/V Hanover Express v. 083 ETD Shanghai 8/15, ETA Los Angeles 8/29
Carriers: Yang Ming, Hapag Lloyd, and ONE
M/V Maersk Enshi v. 932N ETD Shanghai 8/16, ETA Long Beach 8/30
Carriers: Maersk, MSC and Hamburg Sud
If you have cargo scheduled to ship to the East Coast or U.S. Gulf on an all-water service, to minimize time and distance, consider rebooking on a sailing that arrives on the West Coast instead.
When feasible, plan to ship new orders directly to Canada, Mexico, Latin America and the Caribbean, rather than shipping via a U.S. distribution center. This will avoid the product incurring U.S. duties after Sept. 1.
For high-value cargo ready after the middle of the month, evaluate whether the extra cost of airfreighting will be less expensive than paying the increased duty.
Prior to September 1, withdraw items intended for near-term use which are in a bonded warehouse or Free Trade Zone.
3. Actively engage in the customs process
Monitor the timeliness of your customs broker’s entry filings, and ensure your broker has adequate resources to meet the filing deadline. Let your broker know of your short-term shipping plan and your customs brokerage needs. Will they have staff working on Saturday, Aug. 31 if needed?
Importers are required to post a bond with Customs prior to importation. Because the bond’s value must be in proportion to the estimated annual duties your company incurs, review your bond for sufficiency. If you are close to the limit, increase the value now to avoid potential clearance delays. An insufficient bond will cause customs entries to be rejected by Customs.
If you aren’t paying duties by Periodic Monthly Statement (PMS), now is a good time to consider applying. Periodic Monthly Statement eliminates individual payments per entry, and is an interest-free way of paying duties directly to the Treasury Department as late as the 15th of the following business month. Particularly for companies with large duty outlays, PMS reduces the impact on company cash flow.
4. Conduct a pricing review
A pricing review answers four key questions:
What pricing method should be used?
What timing should apply?
With your counsel, review your company’s open sales contracts to see if there are clauses which can be invoked that allow for rate escalations if taxes and governmental fees increase.
With the sales and finance teams, determine the best pricing strategy for your competitive situation. Consider customer and competitor reaction to rate escalations. You may need multiple strategies to cover different situations. For example, if a client’s prices can’t be increased what alternatives could be negotiated?
If you’ve decided to increase prices, determine how you will quote current and new business. One option is just to increase your price. Another is to keep your current price, but add a surcharge (which could be removed if/when the additional duty is eliminated). The advantage of the surcharge is that it implies a temporary situation. The disadvantage is that it’s difficult to be accurate without disclosing your net buying conditions. If you decide on the surcharge methodology, you’ll need a calculation that is explainable without being too informative.
Consider whether the pricing change should apply to new orders, or current orders fulfilled out of new importations, or immediately to orders fulfilled out of current unaffected inventory.
5. Tariff exclusion requests
Once you’ve tackled the urgent shipping, customs and pricing actions, consider filing an application to have your imported product excluded from the additional duties. The rationale for exclusion should include whether a product is only available from China, whether additional duties would cause severe economic harm, and whether a product is strategically important or related to the “Made in China 2025” or other Chinese industrial programs.
There’s no downside to applying and, if granted, an exemption will be retroactive to the date the Section 301 duties were applied. That means, refunds will come back to you from the U.S. Treasury. Another benefit is that waivers are good for one year from the date of issuance, providing your company with time to qualify other suppliers or to shift production. A trade attorney or customs consultant can assist you with the application process. It’s a slow-moving process and there are no guarantees, but it’s well worth the effort.
Over the next few weeks, importers should closely monitor the trade situation in case negotiations resume, or the timeline for duty increases is modified. Navigating the current trade environment has never been more challenging. But your company can make the best of a difficult situation by having a proactive game plan.
Lauren Pittelli is the founder and Principal of Baker Logistics Consulting Services, Inc., a consulting firm focused on addressing transportation, trade and customs consulting needs. Prior to starting Baker, she spent 30 years in senior leadership roles in the freight forwarding and customs brokerage industry, providing transportation, customs and contract logistics services to shippers. A graduate of Harvard College, she is also a licensed U.S. Customs House Broker.