For Firms That Have Not Implemented Tariff Mitigation Strategies, List 3 Hike a 'Wake-Up Call'

Some firms have moved contract production out of China, even though the items they import were only subject to a 10 percent tariff, according to Meredith DeMent, a senior associate in the international commercial practice at Baker McKenzie. DeMent said she personally has seen more than 10 companies move at least some production to other countries. But, she said, many were thinking that their goods might return to Most Favored Nation tariff levels soon, because news reports suggested the U.S. and China were headed toward a deal that would at least have "a phased scaling back of the tariffs."

With this week's developments, it seems they missed an opportunity to start the hard work of finding new vendors. "I think it's a good reminder to companies that you do need to plan for the long term and you need to plan for those worst-case scenarios," DeMent said. "This is a good wake-up call. There's more to come."

She said with Section 301 tariffs, "there are no really good ways to either tariff engineer into a tariff that's not going to be subject or that's not likely to be subject into the future." But, she said, McKenzie clients are finding they can purchase components outside China, assemble in China, and achieve an alternative country of origin because the newly transferred components are the essence of the good. For instance, printed circuit board assemblies. For electronics companies that contract manufacture in China, moving PCBA work to Vietnam, Malaysia or Taiwan can reduce costs. Because of Vietnam's limited capacity, if companies didn't move early there, it's hard to find a partner now.

So far, she said, even the 25 percent tariff doesn't make it worth it to move PCBA work to Singapore or Japan. She said the shortest time frame to make this kind of arrangement is three to six months. "There are certain things they're not willing to move outside of China. They've been satisfied with the cost/quality comparison," DeMent said. "If you go to a country like Singapore or Japan, of course your costs are just astronomical compared to China."

So far, the tariffs are not having the effect of moving U.S. manufacturing to other countries that are not subject to the tariffs, she said. Some of McKenzie's clients have considered moving assembly to Canada, Mexico and other Latin American countries. She warned them to "crunch the numbers, make sure it's worth the effort. Clients have advised moving is more expensive than the tariffs themselves."

With the ever-changing news out of Washington, DeMent is asked how long the 25 percent tariffs will last; whether they have a good chance at getting an exclusion; will that process be open soon. While she can make an educated guess on chances of an exclusion -- only 13 percent have been granted from List 1, with 60 percent of the requests processed -- she really can't reassure them on the other questions.

"It's hard to predict, and we're not in that business," she said. "I don't know that I was ever genuinely optimistic about them reaching a genuine deal that addresses all these practices. I did expect that some deal would be announced." But now, she said, "we seem to be moving in the opposite direction."

DeMent said she expects to have two List 3 exclusion requests ready next week, if the Office of the U.S. Trade Representative is accepting applications then. The USTR originally promised that applications would open by the end of April. But, given that the 25 employees at USTR who have been evaluating the lists 1 and 2 requests have not made any decisions for List 2, DeMent said even the very earliest applications will have to wait many months for a decision. "They would hopefully be able to assign more people, for both their sake and all these companies' sakes," she said. She said the first decisions for List 3 -- which is more than six times the size of List 1 -- might not come in 2019.

The existing exclusion processes for Lists 1 and 2 are “a hot mess!” emailed trade expert David Cohen with with Sandler Travis. With the value and breadth of the goods on List 3 so exponentially larger than those in Lists 1 and 2 combined, Cohen worries USTR's staff won’t be up to the task of handling a third exclusion process, he said.
“Probably not,” Cohen replied when asked if he thinks USTR has the monetary and staff resources needed to launch a List 3 exclusion process. “They are still working on List 1 petitions. They have done nothing on List 2 product exclusions.” The “only solace” is that for petitions that are granted, the exclusions likely will be made retroactive to Sept. 24, when the List 3 duties took effect, he said.