How Automakers Can Avoid A Collision With Tariffs

As the world learned in 2018, President Trump’s tough trade rhetoric is more than bluster. The steel and aluminum tariff announcements in March 2018 caught many companies off guard; before they were enacted, many believed that the president’s tariff threats were just a negotiating tactic that he would never see through. Following that announcement, U.S. trade policy has continued to dominate news headlines as disputes rage on between the U.S. and its major trading partners.

The U.S.-China relationship has been the most contentious, resulting in multiple rounds of retaliatory tariffs amid U.S. allegations of Chinese business malpractice and industrial espionage. To date, nearly half of all Chinese goods brought into the U.S. have been subject to additional tariffs, many at a rate of 25 percent, and the remaining at a rate of 10 percent. That rate is expected to rise to 25 percent in the very near future, if ongoing bilateral negotiations fail—and as the President recently noted, he expects the "Section 301” tariffs to remain in place for some time even if the negotiations succeed to ensure that China adheres to the terms of any potential agreement.

Another major area of U.S. trade policy remains similarly uncertain: potential tariffs on automotive imports. President Trump has voiced support for additional tariffs on imported autos and auto parts, particularly from the European Union. In February, the U.S. Commerce Department concluded a probe into whether imported cars pose a national security threat under Section 232 and delivered their findings to Trump. Trump has 90 days from when the Commerce Department submitted its report on February 17 to decide whether to implement tariffs on autos and auto parts, and it remains unclear whether he will follow through and at what level he would levy tariffs—either at 25 percent or 10 percent. The decision to implement auto tariffs hinges on the outcome of negotiations with U.S. trading partners, including the European Union, South Korea and Japan.

While the future remains uncertain, how can importers of autos and automakers that use imported auto components in production processes prepare for the real possibility of these new tariffs?

 

Scrub tariff codes

When politicians talk about tariffs, they’re actually referring to highly specific tariff codes set and standardized by the Harmonized System Committee of the World Customs Organization.  Automakers need to review these tariff codes meticulously to determine whether they’re correctly applying these highly technical descriptions to their products.  

While the tariff codes for foreign autos are usually easily identified, codes for auto parts are more complicated. Automakers that import auto parts should closely examine their codes in advance of any tariffs going into effect so that they can hit the ground running if new duties are announced. This is as much an engineering exercise as a legal one—companies need to evaluate the nitty-gritty details of, for example, product measurements, material composition, and how the product is used to determine its correct tariff classification. If an automaker discovers it is improperly applying a tariff code to a product, it can change the tariff code and reap immediate, permanent savings. The company may also be entitled to a retroactive refund on duties paid for the preceding 20 months.
 

Lower customs valuations

Automakers can also reduce their duty liability through legal steps that lower the value of imported items. The U.S. “First Sale Rule” allows importers to declare the value of imported items at a value equal to the factory invoice price in a multi-tiered import transaction. Since goods can sometimes change hands multiple times between a foreign producer and the importer, the price can significantly increase by the time it’s declared to U.S. Customs, so use of this rule can significantly lower an importer’s duty burden.

In addition, ways to legally lower declared customs values exist and can be identified through careful consideration of the various cost elements that make up the unit price of an article. This is especially true for related party transactions. My practice pioneered the use of transfer pricing rules to support customs values through multiple Customs HQ rulings over the course of the past 20 years and encourages companies not to overlook this important aspect of potential duty savings and refunds.

 

What’s next?

Even though Trump has yet to make a final decision, auto tariffs are facing significant bipartisan opposition in Congress due to constituent pressure and the potential impact on consumer prices. Tariffs on foreign autos and after-market auto parts would likely increase the price of vehicles and parts for consumers and hurt domestic auto manufacturers that use imported components in their operations. According to the Center for Automotive Research, imported components typically make up 40 to 50 percent of the average U.S. built vehicle. Lawmakers may pass legislation to limit Trump’s ability to declare tariffs under Section 232, but that would likely require two-thirds congressional support to override an almost inevitable presidential veto. For now, automakers will need to wait and see how trade negotiations shake out and do what they can to prepare for new duties.