Complex Section 301 Tariffs on EU Create Tariff Engineering, Supply Chain Opportunities for Importers, KPMG Says

Importers of goods from the European Union need to be particularly careful about the complicated web of country coverage and exceptions under Section 301 tariffs that began in October, according to KPMG trade consultants speaking during a webinar on Nov. 19. The structure of the new tariffs creates opportunities for duty savings in the form of tariff engineering, shifting supply chains and taking advantage of narrow carve-outs.

For example, tariffs on EU wine only cover bottles under two liters, so one company decided to import wine in bulk and bottle the wine in the U.S. to get around the tariffs, KPMG’s Chris Young said, citing a report from NPR. Other carve-outs include that the tariffs do not apply to tokay wine from Hungary and Slovakia, or wines of less than 14 percent alcohol. Companies that want to import stronger wines or Hungarian wines can miss the tariffs that way too, Jack Zeller said.

Other exemptions in the tariffs include blended whiskeys -- even though they are classifiable in the same tariff schedule provision as covered single malt whiskeys -- and Roquefort cheese from France, which is exempt despite tariffs on other kinds of blue cheeses. Olives from the United Kingdom, France, Spain and Germany are subject to tariffs, but green olives that are stuffed or pitted and imported in saline but not “place packed” are not subject to tariffs if they’re French, Zeller said. Nor are olives from Italy or Greece, he said.

These specific requirements make tariff engineering, as in the example of the importer of bulk wine, a valid strategy to get around the tariffs, though importers need to be careful that their scheme isn’t too transparent or it won’t get by CBP, Young said. Shifting supply chains, for example by sourcing olives from Greece or buying used instead of new aircraft, is another way to avoid them.

While the trade spat between the U.S. and the EU could escalate, the most likely scenario is for the status quo to hold or even improve, said Caitlin Dean of the political risk consultancy Eurasia Group. She gives a 55 percent probability for things to continue in their current state. The World Trade Organization will in 2020 likely give the EU authorization to impose its own tariffs in an aircraft subsidy dispute similar to that which prompted the U.S. tariffs, which should give both sides an incentive to negotiate.

There’s a lower, 35 percent chance of moderate escalation, particularly if President Donald Trump imposes Section 232 tariffs on automobiles and auto parts and the EU retaliates, Dean said. And it’s very unlikely but not impossible that there could be “considerable escalation” if negotiations deteriorate or if the bilateral relationship between the EU and the U.S. deteriorates further, she said, putting the probability of that last scenario at 10 percent.