With the United States and China both announcing yet another round of increased and new tariffs, we wanted to summarize what has happened in the earlier rounds of tariffs and highlight a few items and upcoming deadlines U.S. companies can do to address this latest round of tariffs.

US-China Tariff To-Do Items

List 4 – $300 billion – On May 13, 2019, the USTR (United States Trade Representative) announced another list of Chinese products to be hit with 25% tariffs. This list of 3,805 full and partial HTS subheadings covers essentially all remaining products from China that were not already covered by previously announced Section 301 tariffs. The products on this list, worth about $300 billion, include toys, apparel, footwear, manufactured textile, electronics, home goods, sporting goods, and other consumer goods. The only exclusions are for pharmaceuticals, certain pharmaceutical inputs, medical goods, rare earth metals, and critical minerals.

Like it did with the three prior lists of tariffed products, USTR will hold hearings and accept comments as to whether certain products should be exempted from the 25% tariff proposed for the List 4 products. The timeline for the List 4 products is as follows:

June 10, 2019 – deadline to file requests to appear at the USTR hearing for the proposed List 4 tariffs.

June 17, 2019 – deadline to submit written comments on the proposed tariffs, including whether certain specific subheadings should be excluded from the additional tariffs.

June 17, 2019 – Section 301 Committee will convene a public hearing at the main hearing room of the U.S. International Trade Commission (500 E Street SW, Washington, DC 20436) that will begin at 9:30 am. Like the hearings for the prior lists, the hearings may be held over several days.

The effective date of the List 4 tariffs has not yet been announced, so extremely unlikely, it is still possible the US and China will agree to a deal that would stop or at least postpone the imposition of the duties on these products. Based on the timing between the hearings/comments and the effective dates for the prior lists, assuming no deal is reached, it appears likely the tariffs for List 4 will be imposed in mid-July.

After the tariffs are officially imposed on the List 4 products, it is expected that a product exclusion request process will be started for these products, probably sometime in October 2019.

List 3 – $200 billion – The List 3 products ($200 billion) have had a 10% tariff effective since September 24, 2018. Unlike the first two lists of tariff products, USTR did not announce a product exclusion request process on these products because the List 3 tariffs were for only 10%. Now that a breakdown in US-China trade negotiations has resulted in the List 3 tariffs being increased from 10% to 25%, USTR has started up the List 3 exclusion request process. Though USTR has not officially announced the List 3 exclusion request due dates, USTR did issue a draft of the exclusion request forms that are subject to comments (due June 7, 2019).

The draft exclusion requests form for the List 3 products is similar to that used by USTR for the prior two lists of Chinese tariffs, but it also asks for additional and more detailed information than the prior two lists.

Exclusion requests are to cover only a single product, and must include the following information:

the 10 digit subheading of the HTSUS applicable to the particular product requested for exclusion.

the physical characteristics (e.g., dimensions, material composition, or other characteristics) of the product that distinguish it from other products within the covered 8-digit subheading. USTR will not consider requests that identify the product at issue in terms of the identity of the producer, importer, ultimate consumer, actual use or chief use, or trademarks or trade-names. USTR will not consider requests that identify the product using criteria that cannot be made available to the public.

The product function, application, and principal use.

Unlike prior exclusion requests, USTR will ask submitting parties to provide more detailed sales and financial information, including the following:

The company’s gross revenue for fiscal year 2018, first quarter 2018, and first quarter 2019.

The percentage of the company’s 2018 total US gross sales from Chinese products.

The quantity and value of the company’s purchases for 2017, 2018 and first quarter 2019, not only from products imported from China, but also for products from domestic and third-country suppliers.

Identify whether the Chinese product is a final product or an input. If it is an input, companies will need to report the percentage of the total cost of the finished product that is accounted for by the imported Chinese input.

Exclusion requests also should address the following factors:

Whether the particular product is available only from China. In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.

Whether additional duties on the particular product would cause severe economic harm to the requester or to other U.S. interests.

Whether the particular product is strategically important or related to “Made in China 2025” or to any other Chinese industrial programs.

Requesters may also provide any other information or data they consider relevant evaluating their tariff exclusion request.

The List 3 exclusion process will likely be announced around June 30, 2019 with the due dates for exclusion requests sometime in October- November 2019.

China’s Exclusion process for tariffs imposed on US goods imported to China

After the US announced that List 3 tariffs would increase from 10% to 25%, China announced an increase in tariffs on about $60 billion worth of U.S. goods imported into China, effective June 1, 2019.

The China tariffs on US products would increase:

From 10% to 25% for 2,493 tariff lines;

From 10% to 20% for 1,078 tariff lines;

From 5% to 10% for 974 tariff lines;

Remain at 5% for 595 tariff lines.

Quartz Magazine has published an English language list of the products subject to the 25% tariff here. Go here for the list in Chinese of 2,493 products facing a 25 percent tariff, here for the list of 1,078 products facing a 20 percent tariff, here for the list of 974 products facing a 10 percent tariff, and here for the list of 595 products whose tariffs will remain at 5 percent.

China also announced it would initiate an exclusion request process for companies that import, manufacture, or use the U.S. products subject to China’s retaliatory tariffs. U.S. companies should ask their Chinese customers to see if they would be willing to submit an exclusion request for their products. Some of American clients that sell their products into China via Chinese importers and/or Chinese distributers have done that and their Chinese importers/distributers have mostly responded by saying that they would do so, so long as the American company pays some or all of their attorneys’ fees and costs. Applicants for these exclusions are to submit their exclusion requests through the China Tariff Policy Research Center of the Ministry of Finance website. Each request must be limited to a single product and must identify the eight-digit tariff heading. Exclusion requests will be considered based on the difficulty to obtain the imported U.S. product from other sources (domestic, third-country), and also of any structural impact on the relevant Chinese industries.

The deadlines for submitting exclusion requests depends on the particular tariff line and the specific retaliation list. Exclusion requests for certain excluded products are to be submitted from June 3, 2019 to July 5, 2019 and exclusion requests for other of the products are to be submitted from September 2, 2019 to October 18, 2019.

One thing companies (be they Canadian, European, Australian, Japanese, Latin American, or from the United States) should NOT do is just assume that by “having their products made in a country other than China” will free them from US tariffs no Chinese goods. Because doing this might noto only keep them subject to the tariffs on Chinese goods, it can also subject these companies to financial penalties and even jail time.

I bring this up because the belief that shipping a Made in China product to Taiwan or to Vietnam or to Thailand or really to anywhere else in the world before then shipping it to the United States will somehow render that product to no longer be considered to have been made in China for US tariff purposes. If this is all you do we can guarantee your product will still be made in China and you will almost certainly be hit with the full force of the tariffs and with a lot more. And yet, all the time we hear from our own clients and we see on the internet that this fact is not widely understood. The fact that many Chinese factories encourage this sort of illicit transshipping by insisting that it is either “perfectly legal” or “will never be detected” obviously does not help.

In China Tariffs and What to do Now, Part 1, one of our China lawyers (as opposed to one of our international trade lawyer talked about this illegal transhipping of China products to hide their country of origin by starting out that post by making clear this is NOT something anyone should be doing:

Our China lawyers are getting a slew of phone calls and emails from companies that are looking at massive tariffs being imposed on their products imported into the United States. These companies want to know what they can and should do now to ameliorate or avoid their tariff problems. This is the first part in what will no doubt be a constantly ongoing series of posts on what you should be doing in light of the US tariffs being enacted against imports from China.

But before I discuss what companies do about their tariff problems, it is far more important I start out discussing what they should NOT do. They should not have their China products shipped to Taiwan or to Malaysia or to Thailand or Vietnam or anywhere else and then have those products shipped to the United States as though they are not from China. Doing this sort of transshipping can and does lead to massive fines and to JAIL TIME. I am not kidding. I am starting out with a post on what not to do because the risks from this one thing far exceed the benefits of the things we will be discussing in our subsequent posts.

And yet, many are telling us that their Chinese factories are suggesting these exact sort of transshipments and giving assurances that they are legal or that nobody ever gets caught, neither of which are remotely true. Step back for just a second and ask yourself why you are even considering taking legal advice about United States customs law from a Chinese factory owner or salesperson who has all the incentive in the world to sell you Chinese products and very little incentive to keep you out of jail. Please, please, please don’t fall for that. Please.

Chinese companies and the U.S. importers of their products often believe they can get around United States tariffs by transshipping the products to Malaysia, Vietnam, Philippines, Sri Lanka, Thailand, Bangladesh, India, [or some other country] before sending them on to the United States. Their plan is to relabel the products with a new country of origin and then export the products to the US free of China , without US Customs and Border Protection (“CBP”) ever being the wiser.

So wrong.

US Customs has become expert at discovering such evasions and the penalties when caught have become very harsh. Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 USC 1592 and to criminal prosecution under 18 USC 542 (import by using false statement) and 18 USC 545 (smuggling). Lying about a product’s country of origin can subject you to 20 years in Federal prison.

Immigration and Customs Enforcement (“ICE”) has conducted criminal investigations against a number of products, including honey, saccharin, citric acid, lined paper products, pasta, polyethylene bags, shrimp, catfish, crayfish, garlic, steel, magnesium, pencils, wooden bedroom furniture, wire clothing hangers, ball bearings and nails. Many of these investigations have led to criminal convictions and large fines and penalties. U.S. importers have also been prosecuted and sentenced to prison for bringing in Chinese products, such as honey, garlic, wooden bedroom furniture and wire clothing hangers, by means of false Country of Origin statements so as to evade US AD and CVD orders. My law firm’s international trade lawyers are always pointing out that whenever the US increases tariffs on a product, it knows there is an increased likelihood of illegal transshipping of that product and it prepares accordingly. There is zero doubt the U.S. government is preparing to catch those who transship China products to avoid the new China tariffs. There is also zero doubt that both the U.S. government (and even the U.S. populace as a whole) are going to be tougher than usual on anyone who engages in transshipping

United States CBP, ICE and the Justice Department can be very tough investigators and prosecutors.

One of the biggest hammers against illegal transshipping is the False Claims Act (“FCA”). The FCA ( 31 U.S.C. § 3729) allows people or companies to file what are called “qui tam” lawsuits against individuals or companies that directly or indirectly defraud the Federal government seeking triple damages on the government’s behalf. Anyone who knows of the fraud, including a competitor company may file a qui tam lawsuit. And they do.

Qui tam actions are brought to attack competitors and to get 15 to 30 percent of the triple damages the U.S. Government can recover from the lawsuit. Your competitors and your importers and your own employees (and even employees of the Chinese company that has assured you that your transshipping is perfectly legal) are the most likely to initiate a qui tam lawsuit against you, but sometimes it is just someone who learned of what you are doing. Because the person or company that brings such an action can be awarded millions and even tens of millions of dollars, the incentive to file is huge. If you want to get a better idea of just how lucrative these lawsuits can be, do a Google search for lawyers looking to take on qui tam lawsuits and look how much they are paying for qui tam keywords.

Qui tam lawsuits are filed confidentially and are not served on the defendants, but on the US Government. The US Government then determines whether to intervene and pursue the action or settle with the defendant(s). If the U.S. Government intervenes, it takes on primary responsibility for the case. If the U.S. Government decides not to intervene, the initial claimant may dismiss the lawsuit or pursue the lawsuit on its own.