October 1, 2019 Legal & Taxes en_US Understand the impact tariffs have on your small business. https://quickbooks.intuit.com/cas/dam/IMAGE/A21vqU6Ee/e6721c00e83a2ee533e0dbae409752b6.jpg https://quickbooks.intuit.com/r/legal-taxes/understanding-tariffs Understanding tariffs

Trump’s tariffs.

How many headlines have contained those words in the last few years? Before President Trump began publicly discussing tariffs in late 2017, did you at all consider the impact of tariffs on your business?

Just two years later, hardly a day passes when tariffs don’t spark additional debate, or send the stock market swinging one direction or the other. Whether you agree with the Trump administration’s trade policies, it’s hard to avoid the topic of tariffs and their impact to businesses of all sizes.

Even if you avoid getting wrapped up in the tariff debate, there’s a good chance your business has been impacted. BizBuySell recently polled 1,600 small business owners and nearly half indicated they face higher costs due to tariffs. Of those impacted, 64% are planning on raising prices to offset tariff impact.

Tariffs are more than a political debate. They are real and continue to affect more and more US businesses.

What do you need to know about tariffs, and what action do you need to take?

To answer these questions, you need to understand:

  • What is a tariff?
  • What new tariffs took effect over the last few years?
  • What is the current landscape of tariffs for US businesses?
  • How can you prepare, or respond to, tariffs that impact your business?

What is a tariff?

A tariff is a duty imposed by governments of a destination country on imported goods. If you are importing products into the US that are subject to a tariff, the tariff is the amount of money you pay to the US government to get the product into the country.

Tariffs come in two flavors:

  1. Ad valorem basis: a duty calculated in proportion to the value of the imported goods.
  2. Specific basis: a duty calculated relative to an alternative metric, such as weight or type.

A current ad valorem duty applies to steel-toed boots imported to the US. Steel-toed boots imported to the US from World Trade Organization member countries are subject to duty of 37.5% of each pair’s value. A $100 pair of steel-toed boots imported from Germany requires the importer to pay $37.50 per pair in tariff duties.

Alternatively, current sugar tariffs are calculated on a specific basis. Most sugars imported to the US are subject to a tariff calculated by a flat fee, per kilogram. The flat fee generally ranges from 3 cents to 36 cents per kilogram, depending on the type of sugar.

Now that you know how tariffs are calculated, who creates and manages tariffs?

Who administers tariffs in the US?

The US Constitution empowers the US Congress to set tariffs. However, the president has some Constitutional power to impose tariffs. Since the 1930s, US Presidents have taken a more active role in implementing tariffs, and Congress has passed a number of bills that expand the president’s ability to set tariffs (e.g., the Tariff Act of 1930, the Trade Expansion Act of 196 and, the Trade Act of 1974).

Many federal agencies play a role in tariff administration. The three most involved in the Trump administration tariffs include:

  • US Customs and Border Protection (CBP)
  • The US International Trade Commission (USITC)
  • The US Trade Representative (USTR)

CBP’s primary role is to protect US borders. From a trade perspective, it interprets the Harmonized Tariff Schedule (HTS), issues rulings on tariff classifications, and protects the US economy from unfair trade practices, harmful imports and infringing imports.

The USITC’s primary role is to administer trade remedy laws. It provides Congress, the president, and the USTR with research, analysis and guidance regarding international trade, the impact of tariffs and international competitiveness. It also maintains and publishes the HTS, which lists the current duty rates for all imported goods.

The USTR is part of the president’s executive office. It is the president’s primary trade advisor, negotiator and spokesperson. Its historical role has been advisory to the president, and as lead negotiator with the international community.

These three agencies have been key players in the Trump administration’s tariff policy. They have specifically relied on three legal tools to investigate current trade practices, and, in turn, issue the many new tariffs that have recently taken effect:

  • Section 201 of the Trade Act of 1974: empowers the president to impose tariffs on goods that injure or threaten to injure US industries.
  • Section 301 of the Trade Act of 1974: empowers the USTR to investigate foreign acts, policies, and practices that unjustifiably burden or restrict US commerce, and, in turn, the president can implement tariffs among other tactics to remedy the impact.
  • Section 232 of the Trade Expansion Act of 1962: empowers the US Secretary of Commerce to investigate the effects of imports on US national security, and the president can implement tariffs among other tactics to remedy the impact.

The specific agencies and laws mentioned above have been the key players in the Trump administration’s consideration and implementation of recent tariffs. With legal framework laid out, what actually happened?

What new tariffs took effect over the last few years?

Steel and aluminum

In April 2017, President Trump instructed the Secretary of Commerce to investigate the impact of steel and aluminum imports to US national security under Section 232 of the Trade Expansion Act of 1962. The Secretary delivered a report in February 2018.

President Trump announced a 25% tariff on steel and a 10% tariff on aluminum in March 2018 for imports from all countries. This announcement led to retaliatory statements and actions from various countries around the world. The US has since exempted some countries from the steel and aluminum tariffs, including Canada and Mexico.

Solar panels and washing machines

In October 2017, the USITC concluded that imports of solar panels and washing machines caused injury to those US industries under Section 201 of the Trade Act of 1974. In January 2018, President Trump announced tariffs on $8.5 billion of solar panel imports and $1.8 billion of washing machine imports, with the stated goal to safeguard the negatively impacted industries.

China

The bulk of the news, and the majority of the tariffs implemented by the Trump administration, have been directed at China. It started in August 2017, when the USTR initiated an investigation of China under Section 301 of the Trade Act of 1974. The specific inquiry was to determine if China’s laws, policies, practices or actions harmed American intellectual property rights innovation or technology development.

The Trump administration released the findings of the USTR investigation in March 2018, which concluded that China conducted unfair trade practices related to technology transfer, intellectual property and innovation. Soon after the report was released, President Trump threatened tariffs for various products imported from China. Immediately following the threats, China made its own threats of retaliatory tariffs. This began what has now become multiple years of postering, negotiating and tariffs.

The Section 301 tariffs on Chinese imports were implemented through four lists. Each list contained product categories that the Trump administration proposed new tariffs for. After the proposal, each list was subjected to public comment and requests for specific product exclusions that were made.

The first tariffs on Chinese imports went put into effect in July 2018. The July 2018 tariffs are referred to as List 1. Since then, three more lists have been created and implemented, each list being amended multiple times before and after taking effect. Below is a summary of each list:

List 1

List 1 tariffs went into effect on July 6, 2018. The list covered $34 billion worth of products imported into the US from China, with a 25% duty rate. List 1 products were scheduled to increase to 30% on Oct. 1, 2019. That date has been pushed back to Oct. 15. The complete List 1, including those products that have been granted exclusions, can be found here.

List 2

List 2 tariffs went into effect on Aug. 23, 2018. The list covered $16 billion worth of products imported into the US from China, with a 25% duty rate. List 2 products were scheduled to increase to 30% on Oct. 1, 2019. That date has been pushed back to Oct. 15. The complete List 2, including those products that have been granted exclusions, can be found here.

List 3

List 3 tariffs went into effect on Sept. 24, 2018. The list covered $200 billion worth of products imported into the US from China, with a 10% duty rate. That duty rate increased to 25% in May 2019. List 3 products were scheduled to increase to 30% on Oct. 1, 2019. That date has been pushed back to Oct. 15. The complete List 3, including those products that have been granted exclusions, can be found here.

List 4

List 4 was split into two lists (4A and 4B). List 4 generally covers every product group not included in the first three lists. List 4 products are subject to a 15% duty rate. List 4A went into effect on Sept.r 1, 2019. List 4B is scheduled to go into effect on Dec. 15, 2019. List 4A can be found here. List 4B can be found here. 25 products have been removed from this list, but exclusions have not yet been published.

What is the current landscape of tariffs for US businesses?

Currently, US importers face more tariffs than at any other time in the modern era. The bulk of the tariffs are on Chinese imports, but plenty of Trump administration tariffs affect products imported from countries around the globe.

If you import products from China, you should start with the assumption that your product is subject to a tariff. To be sure, review this consolidated list, which includes all four lists combined.

When each list was proposed, various industry groups and companies fought to have their products excluded from the list. Some requests were granted, and others were not. The links offered above indicate which specific products were granted an exclusion.

If you import products from countries outside of China, you need to review the most up-to-date HTS. The HTS is overwhelming at first glance. It attempts to cover every product that is imported into the US, including those subject to tariffs and those that are duty free. To effectively use the HTS, you will need to know the country of origin of your imported product. To better navigate the HTS, make use of the index.

How can you prepare or respond to tariffs that impact your business?

First, you need to determine whether your imported product is subject to a tariff. If you import products from China, review the four lists. If your product appears on one of the lists, check and see if your product falls under an exclusion.

If you import from countries other than China, review the HTS.

For the Section 301 China tariffs, CBP has published Filing Guidelines for Product-Specific Exclusion Requests. If you want to apply for an exclusion, review these guidelines carefully. You will likely need the assistance of an attorney or trade compliance consultant. To apply for an exclusion, CBP has created an online portal to submit the request.

Other options exist beyond fighting for an exclusion. Many small business owners have already indicated that they will increase prices to offset tariff impact. However, raising prices is not an ideal option for most businesses.

Another common response to the tariffs is to source product from countries not subject to the tariffs. Many businesses that source products from China have shifted their supply efforts to countries neighboring China. Vietnam is a popular option.

Don’t forget about sourcing domestic US products. Tariff proponents have pitched domestic sourcing as the natural outcome of the new tariffs. This result has not yet become reality for a variety of reasons; however, sourcing US-made product is an option. With most Chinese imports moving to a 30% duty soon, US manufactured products may become more economically feasible than before.

Tariffs are here. For the time being, they don’t appear to be going away. Existing tariffs will increase soon, and additional products are scheduled to be tariffed this December.

Prepare your business for potential price increases. Carefully examine the products you import, and understand the tariff impact to those products. Consider your ability to source products from other countries, or domestic products. Partner with other businesses to push for exclusions.

If you must increase prices, prepare your customers. You can’t control the White House, but you can control your supply chain. Be proactive, and get in front of tariffs before they impact your business.

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Eric is the founder of Dartsand and Corporate Counsel for a global technology solutions provider. He is a frequent contributor to technology media outlets and also serves as primary legal counsel for multiple startups in the Real Estate Development, Virtual Assistant and Mobile App industries. Read more