Trade tremors: What you need to know

Authored by Brian Simpson

Q: Remind us of the basics – what has happened with tariffs in the past year?

Since mid-2018, the U.S. has placed 10-25 percent tariffs on $250 billion of goods imported from China. In retaliation, the Chinese government has responded with tariffs on $110 billion in U.S. goods, primarily targeting politically important industries such as agriculture and manufacturing. For context, the U.S. is now applying 10-25 percent tariffs on half the value of goods imported from China into this country. In addition to tariffs on Chinese goods, imports of aluminum and steel from most countries (including Mexico and Canada) face tariffs of 10 and 25 percent, respectively.

These tariffs have not been enacted by the U.S. Congress. Under congressional acts passed more than 40 years ago, U.S. presidents have the authority to enact tariffs based on national defense provisions and to address discriminatory trade practices.

President Trump, who campaigned in 2016 on cracking down on what he called “Chinese trade abuses,” has a specific set of demands for ongoing talks with Chinese trade representatives. He seeks to address alleged Chinese theft of intellectual property, forced technology transfers, ownership of American companies in China, and tariff and nontariff barriers, among other issues. If progress is stalled with China’s trade representatives, U.S. tariffs are set to increase on March 2, 2019 to up to 25 percent on all goods currently subject to the mostly 10 percent tariffs. The increase would apply to $250 billion in imported Chinese goods per year.

A formal list of affected goods can be found at the U.S. Trade Representative’s website: https://bit.ly/2PTc1pm.

Q: What can companies do to lessen the business risks associated with tariffs?

Companies impacted by tariffs can file an exclusion request with the Commerce Department or the U.S. Trade Representative’s office, depending upon the types of goods in question. The Commerce Department has already granted some exclusions to U.S. companies seeking exclusions on steel and aluminum tariffs. As of December 2018, of the approximately 57,000 exclusion requests, nearly one-third have been reviewed, and of those reviewed, over 75 percent have successfully received an exclusion.

Until mid-December, 2018, the U.S. Trade Representative (USTR) office had not granted any exemptions on $200 billion in general goods imported from China. On Dec. 21, 2018, the USTR announced exemptions on hundreds of items noted here: https://bit.ly/2Fial7N.

“At this time, the implications for life sciences companies do not differ from those for other manufacturing companies, nor do the recommended strategies to decrease the risks associated with tariffs.”

Other strategies companies can take to reduce the risks associated with tariffs include:

  • Consider sourcing components / goods from countries with friendlier trade relations with the U.S. The U.S. has free trade agreements with 20 nations, mostly with countries in the western hemisphere, Australia, Israel, Jordan, Bahrain and Korea.
  • Consider importing goods into Canada or Mexico, substantially transforming the goods, and then importing the goods into the U.S. as Canadian or Mexican-made products. Companies can pursue such a strategy via third-party collaborators in Canada or Mexico.

Q: What do companies considering a reclassification of their Harmonized Tariff Schedule (HTS) need to address?

Developed by the World Customs Organization (WCO), HTS codes are used to classify and define internationally traded goods. In most cases, in order to import or export a product internationally, the traded good must be assigned an HTS code that corresponds with the Harmonized Tariff Schedule of the country of import.

Many U.S.-based companies are reviewing the HTS codes associated with imported goods to ensure the goods are associated with the correct HTS code. Prior to 2017, incorrectly assigned HTS codes had little to no impact. With 10-25 percent tariffs being levied on half the goods imported from China, an incorrectly assigned tariff code can have substantial financial implications for companies. There are dozens of cases in which two seemingly similar code descriptions have vastly different assigned tariff rates.

Q: What data should be included in HTS reclassifications?

In assessing whether the correct HTS codes are being utilized, companies should review the components, content and construction of each good imported. An analysis of known and possible HTS codes should be undertaken, as well as a review of enforcement data to provide guidance on suitability of current and alternative HTS codes.

“Prior to 2017, incorrectly assigned HTS codes had little to no impact. With 10-25 percent tariffs being levied on half the goods imported from China, an incorrectly assigned tariff code can have substantial financial implications for companies.”

Q: Are there certain tariff issues that impact life sciences companies more than others?

At this time, the implications for life sciences companies do not differ from those for other manufacturing companies, nor do the recommended strategies to decrease the risks associated with tariffs. The original tariff list included components for such products as pacemakers, needles, ultrasound equipment and catheters. The number of products on this list has since been reduced. Pharmaceutical companies are most impacted by the tariffs placed on chemicals used in the production of prescription drugs. Generic drug manufacturers may be more impacted than others, due to their reliance on inexpensive chemicals sourced from China.

Q: What impacts, if any, will the new trade agreement between the Unites States, Canada and Mexico have on the tariff situation?

The USMCA (U.S. – Mexico – Canada Agreement) has been signed by leaders of all three countries and must now be approved by their respective legislatures. Approval is expected in 2019.

With respect to life sciences, the pharmaceutical industry won stronger protection for sales of biologic drugs, which are typically derived from living organisms and administered by injection or infusion. The medicines are among the most costly and innovative on the market and are a major driver of drug spending. USMCA guards new biologic drugs from cheaper generic competition for “at least ten years,” compared with current protection of eight years in Canada and five years in Mexico. The agreement provides extra protection to drug companies in the much larger U.S. market, which currently protects biologic drugs from generic competition for 12 years. 

Q: Getting out your crystal ball – what do you anticipate will happen for 2019 and beyond?

Most political analysts expect that USMCA will be ratified by all three countries and go into effect during the second half of 2019. Regarding trade tensions with China, it is in the interest of both the U.S. and China to secure an enduring agreement on market access, trade deficits, intellectual property issues and non-tariff barriers in both markets. Progress (or lack thereof) will be well covered in the media as the March 2, 2019 deadline approaches.

Baker Tilly has helped numerous companies develop strategies to reduce the impact of tariffs, including filing exclusion requests, HTS reclassifications and assessing feasibility of working with third-party partners.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.