US-China tariffs explained for Asian exporters

US-China tariffs now apply to goods worth about $250 billion a year, and a fourth round that could reach nearly everything else is on hold. If you sell parts, materials or finished goods in Asia that end up in the United States, these rules can change your costs. This note explains what is in force on July 3, 2019, and what you can check in your own orders.

The three tariff lists in force

The US Trade Representative (USTR) ran a Section 301 investigation into China's technology transfer and intellectual property practices. It then put extra duties on Chinese goods in three steps. These steps are called Lists 1, 2 and 3.

List 1 covers about $34 billion of goods. The 25 percent duty began on July 6, 2018. List 2 covers about $16 billion. Its 25 percent duty began on August 23, 2018. List 3 is the biggest, at about $200 billion. It began on September 24, 2018, at 10 percent.

The duties sit on top of the normal tariff for each product. They apply to goods made in China. They do not apply to goods made in Vietnam, Malaysia or Taiwan just because a Chinese firm sells them.

Sources: Jones Day, "Recent actions relating to Section 301 tariffs on imports of Chinese origin products," July 2018 (jonesday.com); Dorsey and Whitney, "US third set of tariffs on products from China," September 2018 (dorsey.com).

What changed on May 10

List 3 changed this spring. After trade talks stalled, USTR announced that the rate on List 3 would rise from 10 percent to 25 percent. The new rate took effect at 12:01 a.m. on May 10, 2019.

The rise matters most for goods in the List 3 range. That list is wide. It includes many inputs, such as components, chemicals and materials, as well as some consumer goods. Many Asian factories buy these inputs from China and ship the finished product onward to US buyers.

USTR also said it would set up a formal way for US importers to ask for exclusions on List 3 products. It said this would work like the processes already open for Lists 1 and 2. On June 24, 2019, USTR announced how importers can file those requests, so check USTR's site for the current steps.

Sources: BDO, "List 3 China 301 tariffs scheduled to increase from 10 to 25 percent on May 10, 2019" (bdo.com); Expeditors, "Duty set to raise to 25% on List 3 of Section 301 tariffs" (info.expeditors.com); White and Case client alert on the List 3 increase (whitecase.com).

The proposed fourth list

On May 13, 2019, USTR proposed a fourth list. It would put duties of up to 25 percent on the remaining Chinese imports, worth roughly $300 billion a year. That is a large group of consumer goods, such as clothing, shoes and electronics.

This list is only a proposal. USTR took written comments and held a public hearing in Washington on June 17, 2019, with more hearing days after that. No List 4 duty is in force today.

On June 29, at the G20 meeting in Osaka, the US and Chinese presidents agreed to restart trade talks. The US side said it would hold off on new tariffs for now. Reports said the existing tariffs stay in place. The deal left many details open.

Sources: Jones Day, "List 4 is here," May 2019 (jonesday.com); Livingston International, List 4 hearing and comment dates (livingstonintl.com); Al Jazeera, "G20 summit: China, US pause trade war with talks back on track," June 29, 2019 (aljazeera.com).

What Asian exporters can check now

Start with your bill of materials. Mark each part or material that comes from China. Then ask where each one is made, since the duty follows the country of origin and not the place of shipping.

Next, find the tariff code for each item. Duty lists are written by code. Compare your codes with the lists on the USTR website. A US importer or customs broker can confirm whether a code is covered and at what rate.

Then look at your contracts. Ask who pays the duty, you or the buyer. A price quoted before May 10 may not cover the higher List 3 rate. Many firms add a clause that shares the cost if tariffs change.

Last, plan for List 4 without acting on it yet. You can price two cases, one with the proposed duty and one without. That way you can move fast if the talks fail or succeed.

Sources: USTR, Section 301 tariff actions page (ustr.gov); US Customs and Border Protection guidance on Section 301 duties and country of origin (cbp.gov).

Why the origin rule matters

Some firms are tempted to ship Chinese goods through a third country to avoid duty. Customs treats origin by where a product was made or substantially changed. Simple relabeling or repacking usually does not change it. Getting this wrong can bring back duties, penalties and delays at the border.

A safer path is to document each step of your process. Keep records of where materials came from and what work was done. Good records also help your buyers when they file for an exclusion.

This is general information only. Before you change a tariff code, a duty budget or a supplier, have a licensed customs broker or trade lawyer check your own goods.

Sources: US Customs and Border Protection, rules of origin and Section 301 guidance (cbp.gov); USTR, Section 301 tariff actions (ustr.gov).