“Good things are happening at China Trade Talk Meeting,” President Trump tweeted on Oct. 11. Did this announcement reduce anxiety among corporate trade professionals? Maybe.
Or perhaps there was an audible sigh of relief when The New York Times and other media outlets confirmed that the highly charged negotiations between Washington and Beijing were progressing favorably. “We’ve come to a very substantial Phase One deal,” the president announced that same day, following meetings with Chinese Vice Premier Liu He. “There has never been a deal as substantial for the American farmer.”
The Phase One deal includes the possibility of postponing additional tariffs on Chinese goods and an agreement by China to purchase $40 to $50 billion in U.S. agricultural products. It also addresses currency foreign exchanges, though not in their entirety, as well as financial services. Additionally, Trump said there was “good progress” on intellectual property and technology issues. The administration said it expects to finalize a written agreement in about four weeks.
Is the promise of a limited trade deal enough to quell the anxiety of importers around the world who have endured an unprecedented and prolonged trade war with deep roots? Perhaps it’s naïve to suggest that modest progress between the United States and China is enough to turn the tide — particularly when the volatility and uncertainty is not limited to U.S.-China trade relations. There also is the U.K.’s unresolved exit from the European Union, the ongoing Japan-Korea trade war, slow progress in the USMCA trade treaty talks, and challenges to the farming deal struck between the European Union and the Mercosur countries of Brazil, Argentina, Uruguay, and Paraguay.
Is the promise of a limited trade deal enough to quell the anxiety of importers around the world who have endured an unprecedented and prolonged trade war with deep roots?
All of this leaves trade managers at multinational companies looking for creative ways to keep supply chains running and duty expenditures at a minimum. Global trade specialists from EY shared a few ideas for companies to explore during a Thomson Reuters-EY seminar conducted earlier this month in Hoboken, N.J. These ideas include:
Use of free trade agreements — Consider countries besides China as places where you can source goods, either finished products or components, to avoid tariffs and take advantage of preferential duty under a free trade agreement. Take an overall snapshot of your supply chain and connect the dots from country to country to see where a free trade agreement may help. There are tools available to help with this analysis if it’s too difficult to evaluate manually.
Change where goods are made — Research whether it is possible to alter your supply chain to change the country of origin to a location other than China. Even if there’s no free trade agreement in place with this other country, assess whether you can move assembly to ensure the final product is not from China.
There is risk here. You must show a substantial transformation of the product, which can be a subjective judgment. In addition, China has the manufacturing infrastructure, employee skill sets, and price point that companies want — and alternative countries may not have in place — so the trade-off may not ultimately be beneficial.
Look at the classification — Determine the feasibility of altering production in a way that transforms the product to a classification not subject to tariff levies. You also should evaluate your current classifications to ensure accuracy. Imagine the easy savings if you discovered a product that you believed to be subject to additional duty was, in fact, misclassified and the correct Harmonized System classification number was not subject to the additional duties.
Of course, virtually all products will carry an additional duty if the U.S.-China trade truce falters and the United States imposes the additional tariffs. In this case, a change in classification may be ineffective.
Valuation planning — Examine whether you can lower the value of your goods by employing the “first sale for export” rule to lessen the amount of duty paid. You may be able to declare the earlier sale in the supply chain as the value of the goods under a specific set of criteria and avoid paying duty on the middleman markup.
This solution is not always workable, because the factory may not provide its price, there may be a related-party transaction that creates additional burdens to meet, and there are always additional administrative costs to track on each sale.
Change your supply chain structure — Another way to reduce the burden of retaliatory duties is to reduce value by unbundling the components of the transaction value. You potentially could change your supply chain in order to pay the factory for your merchandise and a separate IP company to license the trademark. If you are not paying the factory that is making the goods for the trademark, you may be able to exclude the value of the trademark in the transaction value of the goods.
Of course, a U.S.-China trade deal might make these types of tactics unnecessary — but trade and supply chain professionals have learned not to expect too much too fast.
Less than a week after the president lauded the trade talks and the prospect of a Phase One deal, a new round of headlines appeared, including Doubts Emerge About the U.S.-China Trade Deal in MarketWatch, The Pretend Trade Deal in Foreign Policy, and Why the U.S.-China Trade War Truce Could Be a ‘Nothing Burger’ in Fortune.
Skilled corporate trade specialists would be wise to watch for hopeful signs, prepare for the worst, and assess all the tools and tactics available to keep their companies ahead of the game.