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Oct. 25, 2019

Dispelling Tariff Confusion: The Top 3 Questions Answered

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The past year has seen numerous tariffs announced, delayed, re-announced, implemented, and canceled. Add to that new regulations around classifying goods and qualifying for exceptions and you have understandable confusion. In response, Flexport has launched a webinar series, State of Trade: Tariffs Q&A, featuring two of Flexport’s tariff experts, Dr. Phil Levy, Chief Economist and Tom Gould, VP of Customs and Trade Advisory.

Below are the top three questions asked by logistics and supply chain professionals to understand how to minimize tariff impact—and take advantage of Flexport’s expertise and industry perspectives.

1. What is duty drawback and what are some of the requirements for eligibility? Duty drawback is an export incentive program that lets companies recover certain duties, taxes, and fees paid on merchandise that's been imported. Drawback is one of the oldest and most complex trade provisions in United States law, designed to encourage foreign exports. In fact, its origins can be traced back as far as 1789.

“While there’s a large upside for shippers, drawback has proven to have more stringent recordkeeping requirements than importing, and the execution of such can often involve very detailed and thorough inventory records,” says Tim Vorderstrasse, Duty Drawback Manager at Flexport. In general, he explains, there are three primary use cases in which goods can be eligible for drawback:

  • Manufacturing: when imported merchandise is used in a manufacturing process of a product that’s exported (or destroyed).
  • Unused Merchandise: when imported merchandise is exported, or destroyed domestically, without being used.
  • Rejected Merchandise: when imported merchandise, which does not conform to sample or specifications, is shipped without the consent of the consignee. Rejected merchandise can also be goods that have been determined to be defective as of the time of importation or at the time of retail sale. Import to export must be within one year.

For all drawback provisions, a claim for drawback may be filed up to five years from the date of importation or entry. While drawback can be a little complicated, there’s good news: the United States Trade Representative has approved Section 301 tariffs (known as “the China tariffs”) as eligible for duty drawback.

2. What’s a substantial transformation? Can you give an example in which you’re sourcing material elsewhere but manufacturing in China? Substantial transformation is a customs principle that’s used to determine the country of origin of a product for the purposes of assessing duties when an item that’s being traded doesn’t come wholly from one country. Customs looks for evidence that the component parts of a product, from countries A, B, C, have been substantially transformed—that is to say, having undergone a “fundamental change” in value, form, appearance or nature—in the creation of a new product in country D.

For example, consider printed circuit boards. Customs has ruled in many situations that a printed circuit board (PCB) and all of the electronic components, including the microprocessor, are substantially transformed when they are mounted on the PCB to create a printed circuit board assembly (PCBA). But, if the PCBA is created outside of China—e.g. Vietnam—and that PCBA is used to manufacture a router or other electronic product in China, it is possible that Customs will find that the PCBA is not further substantially transformed.

3. What is the de minimis threshold? Do you expect Congress to make any near-term changes to the $800.00 de minimis under Section 321? In the world of trade, the de minimis principle refers to a threshold in which certain low-value packages can be moved across international borders with simple customs requirements—tax- and tariff-free. Dating back to the original 1992 NAFTA deal, Canada, Mexico, and the US all set their own de minimis threshold for incoming parcels. This threshold is especially relevant in the age of e-commerce: the existence of de minimis allows US importers to import parcels up to $800 in value duty-free.

“While I don't anticipate that Congress will move to lower the current $800 de minimis amount, there is a possibility that the US could lower the amount on imports from Canada and Mexico,” says Tom Gould, VP of Customs and Trade Advisory at Flexport. Under the US-Mexico-Canada draft trade agreement (USMCA)—not yet ratified—Mexico agreed to raise its de minimis shipment value level for duties to approximately US$117 and Canada agreed to raise theirs to C$150. “Something to note is that the current draft agreement includes a footnote that allows each country to lower its de minimis threshold to an amount that is comparable to the other country; because of this footnote it is possible for the US to lower the de minimis amount for shipments from Mexico and Canada,” noted Gould.

Ready to Tackle Tariffs?

Tariffs don’t have to be confusing. For more information on which tactics might be right for your business or to speak with an expert, please visit Flexport’s Customs page.

And, for more insights on all things tariff-related, check out TariffInsider.com, curated and original content on global trade and tariffs.

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