President Trump’s imposition of additional tariffs on imports of steel and aluminum dominated global trade news headlines for most of 2018 and caught many manufacturers off guard. Prior to the first announcement in March, many in the industry believed that the President’s tariff threats were merely a negotiating tactic and would likely never materialize. By June 2018, the Trump administration left no doubts that it would follow through.
On the basis of protecting U.S. national security, the U.S. imposed additional tariffs of 25 percent and 10 percent on steel and aluminum imports for almost all countries under Section 232 of the Trade Expansion Act of 1962. Specifically, the Section 232 action affects steel articles classified under HTSUS subheadings 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90, and aluminum articles described as follows: (a) unwrought aluminum (heading 7601); (b) aluminum bars, rods, and profiles (heading 7604); (c) aluminum wire (heading 7605); (d) aluminum plate, sheet, strip, and foil (flat rolled products) (headings 7606 and 7607); (e) aluminum tubes and pipes and tube and pipe fitting (headings 7608 and 7609); and (f) aluminum castings and forgings (HTSUS 7616.99.5160 and 7616.99.5170).
Since the administration’s initial announcement, the U.S. and its major trading partners, including the EU, South Korea, and China have traded a series of exemptions, extensions, and retaliatory tariffs. Talks to deescalate trade tensions have had varying degrees of success. After imposing retaliatory duties on American-made goods, the European Union and the U.S. entered into talks to draw down to zero-tariff levels, but they haven’t yet reached a permanent agreement. Other countries, like South Korea, immediately sought and secured permanent exemptions from certain U.S.’ tariffs.
The U.S.’ trade relationship with China has been significantly more volatile. In the months following President Trump’s proclamations, the U.S. and China placed multiple rounds of tariffs on each other’s imports. In 2018, the U.S. imposed tariffs on over $250 billion worth of imports from China under Section 301 of the Trade Act of 1974. To date, nearly half of all Chinese goods brought into the U.S. are subject to additional tariffs, many at 10 percent and a significant portion at 25 percent if ongoing bilateral negotiations fail.
U.S. manufacturers have long relied on China as a source of affordable manufactured materials. They had no need to explore alternative sources for decades. Now, manufacturers are reexamining old assumptions. At least for the duration of the current administration, tariffs will always be on the table—if not always in effect. And there is no guarantee that future administrations will entirely remove existing tariffs or refrain from implementing new tariffs.
Tariffs are already disrupting manufacturers’ supply chains—increasing costs and eroding margins. Continued trade uncertainty is generally bad news for manufacturers, complicating business planning and hindering growth.
How, then, can manufacturers mitigate the impact of tariffs, and position their businesses for sustainable, long-term growth?
Submit Product Exclusion Requests
To avoid making major adjustments to supply chain—which may not be an option for manufacturers of specialty items or those that lack the significant time and capex allocations required—manufacturers affected by Section 301 tariffs submitted product exclusion requests to the Office of the U.S. Trade Representative (USTR) for goods described under Lists 1 and 2 (USTR is no longer accepting product exclusion requests for List 1 and 2 items and has yet to open a docket for List 3 requests). Manufacturers affected by Section 232 tariffs may continue to submit product exclusion requests to the Department of Commerce.
In late December 2018, USTR announced the first set of products, all under List 1, that it approved for exclusion from its Section 301 action. The exclusions are retroactive as of July 6, 2018. Anyone that imports goods approved for exclusion under the Section 301 stand to benefit because approvals are not limited to specific requestors. Manufacturers and importers should examine the Section 301 list of excluded products to see whether their imports qualify for relief. Approved exclusions will remain in effect for one year. USTR indicated it is still reviewing other Section 301 product exclusion requests and decisions will be forthcoming.
According to a recent Wall Street Journal report, the Department of Commerce granted about 75% of the 19,000 requests it received to exclude products subject to Section 232 tariffs on foreign steel in 2018. The Steel Manufacturers Association received approvals for exclusion on 66 of 132 requested tariff lines—a significantly higher success percentage than other industries, The Wall Street Journal reported in October 2018. For comparison, the National Retail Federation and National Restaurant Association were granted less than 5 percent of their requested exclusions.
Successful requests involve significant investments of time and resources. The Steel Manufacturers Association’s success was the result of a strategic, coordinated effort: a combination of data-driven exclusion requests and government relations efforts. Manufacturers should keep track of their direct and indirect costs resulting from the tariff actions and model impacts on growth plans as part of internal strategy data analytics. When preparing exclusion requests, manufacturers should seek to establish that there are either no feasible alternative suppliers of items in the U.S. or abroad and/or tariffs will have serious adverse economic impacts on their business’ operations, their downstream and upstream partners’ operations, as well as their industry as a whole. To understand the full scope of tariffs’ impact on their business, manufacturers need to have open channels of communication with upstream and downstream business partners whose respective supply chains may also be impacted. Additionally, manufacturers should maintain coordinated government relations efforts to ensure elected representatives are aware of how tariff actions are impacting their constituents’ bottom lines and job prospects.
Rethink the Supply Chain
Nevertheless, many requests for product exclusion are denied. As such, business owners should not assume that pending applications will receive a favorable outcome. If a manufacturer is unable to secure an approval for exclusion, they may need to consider alternative sources for imports. If alternative sources exist, then businesses need to evaluate cost and quality across those options.
If no alternative sources exist, for example, for highly specialized and customized goods, manufacturers may need to redesign products in a manner that allows them to change countries of origin. This endeavor may entail building entirely new supply sources. Rebuilding supply chains has inspired déjà vu among many manufacturers, who haven’t had to make these kinds of ground—up sourcing decisions since inception years ago.
Under the current administration, trade imbalances and national security are used as justification for additional tariffs. When evaluating alternative sources, manufacturers should consider whether the new source country’s overall trade posture and geopolitical sensitivities are likely to threaten the United States. If so, the new source country may be a potential target for future tariffs.
Plan for the long term: Revaluate the Core Business
The safest route for long-term planning is to act as if tariffs are here to stay. Tariffs will likely always be on the table under the current administration, and there are no guarantees that a future administration will shift course if tariffs yield favorable geopolitical results.
As manufacturers assess their options, they may discover that locating or creating an entirely new supply source for certain may not be financially feasible. Business owners may need to reevaluate whether it makes fiscal sense to continue producing certain products at all, and whether they need to refocus or shift production to products less impacted by trade barriers.
About Johny Chaklader
Johny Chaklader is Export Controls and International Trade Practice Lead within BDO’s Industry Specialty Services – Government Contracts Group. He can be reached at firstname.lastname@example.org.