Attorneys Say China Links Becoming More Dangerous in Auto Parts

While CBP rulings on country of origin show there are ways to keep China in the supply chain and still avoid Section 301 tariffs, Thompson Hine attorneys, during a webinar on what to expect in trade in 2023, said that if your product is auto parts, electric vehicle battery components, chemicals, pharmaceuticals or critical minerals, your chance of avoiding tariffs or other regulatory restrictions is not great.

Dan Ujczo, who said the firm analyzes all of the nearly 1,100 Customs Rulings Online Search System (CROSS) rulings related to country of origin, said that in 2019 or 2020, if the word "China" was anywhere in the submission, it was tough to avoid the Section 301 tariffs. But, he said, now "U.S. CBP seems to be a bit sympathetic."

He said the agency is being consistent about what results in a country of origin designation. He said if production starts in the Philippines, Thailand or Vietnam, and the product is then assembled in China, it will not be considered Chinese. He said there have been a lot of opinions on hand tools, scissors, garden rakes, hoes that follow this pattern.

"As long as you’re not trying to have the whole supply chain in China and simple assembly in Vietnam or Mexico … then you're OK," he said Jan. 31. But then he added that if the product is from one of those politically sensitive categories mentioned above, it's going to be much harder to avoid higher tariffs.

In addition to the question of Section 301 exposure, there's a chance that auto parts may fall under Uyghur Forced Labor Prevention Act scrutiny. Frances Guerrero, speaking about UFLPA on the same webinar, said: "I expect that we will see the focus move to different industries -- we’ve seen a lot dealing with solar in the last year, a lot dealing with cotton and textiles."

She said many listeners saw the report from Sheffield University on the Xinjiang ties in the auto parts industry (see 2212060054), and she said she would not be surprised if there are detentions in that sector in 2023 as CBP investigates those supply chains.

"They move from industry to industry as they get smarter," she said.

She also noted that CBP has cited Sheffield University reports in the past as it issued guidance about forced labor.

"We also know the reports have resulted in congressional inquiries being sent to some of these companies," she said (see 2212220045). "The regulators can lean on this as a place to start."

Forced labor and China country of origin rulings aren't the only trade complications for the auto industry.

Ujczo, who is a close observer of USMCA and the auto industry, noted that the U.S. lost its argument in the auto rules of origin dispute.

"The bottom line is that Canada and Mexico and the automakers said: the rules we agreed to in the agreement are the agreement. You can’t put conditions on it."

He said the firm expects CBP will issue new guidance on auto rules of origin by the end of March. In response to a question from International Trade Today, he said he thinks the U.S. will comply with the panel ruling, though it may not want to do so quickly, given the ongoing dispute over Canadian dairy TRQs. "I think USTR will comply. It’s just a question of when, and getting what in return for it," he said.

He also said that the U.S. may decide that even though roll-up makes USMCA auto rules weaker, they can address that through the Inflation Reduction Act tax restrictions for electric vehicles.

The IRA conditions consumer tax credits on North American content of the batteries. He said that typically, the IRS has defined "substantially all manufacturing or assembly" as 80% or more local value.

The attorneys also talked broadly about what will happen with the Section 301 tariffs as a result of the quadrennial review. David Schwartz said they expect the review will be completed by Sept. 30 this year. He said he expects the government will not side with commenters arguing for higher tariffs nor those arguing to remove the tariffs. The conflicting comments "will likely lead to a draw," he said.

He said he expects a new product exclusion process will open.

Ujczo said importers saw from the last round that it's not enough to say that trying to move out of China would cost the company too much, so an exclusion is needed.

To argue "it will cost us more money to make if we don’t make it in China," he said, "that was understood." So, he said, if you want to be successful in a future exclusion round, you had better show how many jobs are in jeopardy in the U.S. because of the tariff costs.

Schwartz said he couldn't predict how the Court of International Trade will rule on USTR's response to its previous instructions to provide better responses and explanations for how it implemented List 3 and List 4a. It could remand the case again, affirm the two lists, or vacate the tariffs, he said. He said the final decision is expected by summer.

"Whatever decision the CIT does come up with, it will be appealed by the losing side," he said.