Though the United States and China continue trade negotiations this week it has already been more than a year since the Office of the United States Trade Representative published its findings in the Section 301 investigation of China’s trade practices relating to IP, technology transfer and innovation. The results of this investigation led to increased tariffs on Chinese products.
The trade talks between the United States and China resume when Chinese Vice Premier Liu, China’s chief trade negotiator, will visit Washington this week as a follow up to the trip to Beijing last week by U.S. Treasury Secretary Mnuchin and Trade Representative Lighthizer. For an interesting take on how linguistic and cultural issues are bogging down these talks, check out Lost in Translation: Why Using the “Foreign” Language Almost Always Makes Sense.
As talks between the two countries continue, the U.S. collection of Section 301 duties also continues. Though importers of subject Chinese products have felt the significant burden of the increased Section 301 duties, imports of subject products also expose importers to enforcement actions by U.S. Customs and Border Protection (CBP). As a result of the Section 301 tariffs, importers are seeing increased scrutiny by CBP of its imports. Like with other special duties — such as antidumping and countervailing duties — CBP will actively monitor and audit high-risk Section 301 activity.
To recap the Section 301 duties in effect, the increased tariffs have been in place now for 9 months, starting, for certain goods, last July. To date, the United States has implemented three rounds of tariff increases under Section 301 on a total of $250 billion worth of Chinese products. Since July 6, 2018, the U.S. has imposed a 25% duty on products from China, totaling $34 billion worth of imports composed of 818 tariff lines (List 1). Another round of Section 301 tariffs on an additional $16 billion (List 2), composed of 274 tariff lines, took effect on August 23, 2018. If importers’ goods weren’t captured in the first two rounds of tariffs, many found their goods covered by the much larger, and widely applicable third round. This set covered an estimated $200 billion in annual imports from China composed of 5,745 full and partial tariff lines (List 3). The List 3 goods are subject to a 10% duty effective September 24, 2018. The 10% duty was set to be hiked up to 25%, but the Trump Administration has twice postponed the increase as the trade talks continue with China.
Few products have been granted exclusions from the Section 301 duties and most of the listed Chinese products remain subject to the increased tariff requirement. An exclusion process has not yet been established for the largest of the three lists, the List 3 products.
CBP’s Office of Regulatory Audit is reportedly increasing enforcement of goods subject to Section 301 tariffs. In connection with its enforcement efforts, we have learned that CBP will be increasing the number of auditors from around 370 to at least 500. The expansion of the Regulatory Audit office is also in line with CBP’s strategic plan ti implement its mandate under the 2016 Trade Facilitation and Trade Enforcement law. The overall goal of the new law is to protect the economic security of the United States and revenue collection is a re-prioritized trade issue for CBP. With an estimated $250 billion worth of goods subject to the Section 301 duties, collection is a priority. Our customs lawyers are already seeing increased enforcement.01
Importers are likely to see increasing CBP enforcement actions in different forms. CBP is not limited to full scale audits (Focused Assessments), of import activities. Importers may first see CBP Requests for Information-CBP Form 28s. CBP can also issue informed compliance notification letters, audit surveys or conduct single-issue, Quick Response Audits, of importers.
CBP uses importers’ size and activity (value/volume) as a risk factor for selecting companies to audit, but it can (and does) target any importer on any issue. The normal target company imports between $50 to $100 million or more annually. Companies that import high-risk goods are relatively high risk candidates for some type of CBP audit process even if they import in low volumes.
CBP will scrutinize imports subject to Section 301 tariffs for revenue collection to check for unlawful attempts to evade these duties. Even legitimate ways importers have mitigated the impact of Section 301 duties can draw scrutiny from CBP. CBP is checking for reclassifying products, changing the country of origin, and/or decreasing the customs valuation (for example, by declaring the “first sale” price in sequential sales, rather than the price the U.S. importer pays). For more on country of origin risks, check out China Tariffs and What to do Now, Part 1.
Inaccuracies or inconsistencies in the audited data can result in additional duties and significant penalties, ranging from double the import duty loss for mere negligence up to the entire value of the imported merchandise when fraud is involved. Given the penalty exposure and for import compliance, importers should carefully review their Section 301 import activity to ensure they are complying fully with the Reasonable Care standard required of importers by 19 U.S. Code § 1484. The reasonable care standard mandates importers of record use reasonable care to enter, classify and determine the value of their imports and provide any other information to enable CBP to properly assess duties, collect statistics and determine whether all legal requirements have been satisfied.
To put it bluntly, now is NOT the time to get things wrong.