President Biden’s recent expansion of 301 tariffs on certain China imports may send corporate China Plus One (C+1) initiatives into hyperdrive as more and more manufacturers relocate production from China to tariff-friendly countries in Southeast Asia and India. Let’s examine exactly what’s happening and some of the implications for logistics and trade compliance professionals.
What Happened?
On May 14, 2024 President Biden issued a Memorandum stating that the U.S. would maintain existing 301 tariffs on certain Chinese imports (initiated during the Trump administration) and also put in place new 301 tariffs, and some 301 tariff increases, on certain product categories. The move, according to White House communications, is a response to China’s “unfair trade practices… that are threatening American businesses and workers.”
Below are targeted product categories. See this press release and this White House fact sheet for details.
On May 22, 2024 the U.S. Trade Representative (USTR) issued a formal notice in the Federal Register providing additional details on the new tariffs, as well as important new details on product categories that could qualify to be excluded from Section 301 tariffs – including certain machinery and solar manufacturing equipment. These new details include HTS codes and product descriptions for the proposed new 301 tariffs and the exclusion categories. The current preliminary recommendations will be finalized after a comment period during which companies can petition for their category of goods to be excluded.
Additionally, the notice established specific effective dates for the new tariffs. Those slated to start in 2024 are forecasted to start August 1, 2024. Tariff increases slated for 2025 and 2026 are forecasted to take effect January 1 of these years.
A follow-up notice on May 24, 2024 provided an update on Section 301 exclusions set to expire May 31. Some were extended to June 14, 2024 and others to May 31, 2025.
How are shippers reacting?
Early indications are that manufacturers are even more worried that a “made in China” designation will make them less competitive going forward, as their customers seek alternate suppliers to avoid the increased tariffs.
According to Kevin Zhang, Dimerco’s Sales and Marketing Director in Beijing, “Over the past two years, boardroom discussions about a China Plus One strategy have turned to action with companies actively diversifying production beyond China.” He added, “In the semiconductor industry, a focus area for Dimerco Express Group, we’ve seen OAST factories (Outsourced Semiconductor Assembly and Testing) and terminal assembly factories moving to South Korea, Taiwan, Vietnam, Malaysia, Thailand, the Philippines and India.”
Mexico is also benefiting from C+1. In January 2024, China shipped 117,000 TEUs (20ft equivalent containers) to Mexico – a 60% increase from January 2023, when just 73,000 TEUs were shipped.
This current trend is likely to accelerate with the latest Biden Administration announcement. With U.S. elections slated for the end of 2024, a change in administration would likely result in even more stringent trade protection measures, so an easing of trade protection policies is very unlikely in the coming years.
China Plus One: proceed with caution
The primary trigger for China + 1 initiatives is to avoid the added duty payments on Chinese imports. But moving production from China to, say, Southeast Asia, doesn’t necessarily eliminate the tariff. It’s not that simple.
All countries have their own ways to determine country of origin and whether products are eligible for favorable tax treatment, including free trade agreements. When a product does NOT come entirely from a single country, the internationally recognized legal principle of “substantial transformation” is used to determine the origin of the good.
For instance, if sugar from country A, flour from country B, and dairy products from country C are taken to country D to make cookies, then the finished goods will likely be deemed “made in country D” because the inputs were substantially transformed.
But you can’t ship a product from China to Vietnam, put a “Made in Vietnam” tag on it and file paperwork as if the products were wholly made in Vietnam. Trade compliance requires far more diligence than a change of address. Check out our guide: Global Trade Compliance: Understanding the Basics.
As sourcing and manufacturing strategies change, it’s vital to involve your trade compliance people as early as possible. They’ll have a good sense of what will and won’t fly with the U.S. Customs and Border Protection agency (CBP). Smaller companies without internal trade compliance staff should seek outside help from their freight forwarding partner or a Customs consultant.
“No one can row the boat alone right now,” says trade compliance consultant Karen Kenney. “The issue is far too complex. Unfortunately, companies are moving too quickly to create more tariff-friendly supply chains – and some are getting burned.”
It’s not just country of origin questions that complicate the subject of tariff avoidance. The issue of forced labor has been, and will continue to be, a top priority for the U.S. through CBP enforcement. The advent of AI and big data tools make it difficult to hide non-compliance.
Compliance consultant Kenney warns shippers not to underestimate the ability of CBP to root out non-compliance. “The technology at their disposal is incredible,” she says. “For instance, they can perform DNA testing on cotton materials and conclude, with confidence, that the cotton was picked in areas known to use forced labor.”
One of the easily missed details of the Biden Administration’s tariff expansion is increased funding for CBP enforcement efforts on U.S. imports. The level of technology-aided enforcement will only increase moving forward.
Logistics challenges with China Plus One
The challenges of diversifying production beyond China go far beyond trade compliance. As we discuss in our eBook, “The Logistics of China Plus One,” the logic behind a China Plus One strategy is sound, but implementing it is another story.
Doing business in Malaysia or Vietnam, for instance, is different than in China, where the supporting infrastructure is strong. Companies must plan carefully for a move, looking at issues like inbound and outbound freight capacity, road systems, workforce skill and availability, and the relative “business friendliness” of the governments and regulating agencies. Any of these logistical issues could undermine the hoped-for benefits of a C+1 strategy.
One solution is to work with a global 3PL, like Dimerco, that has the know-how needed for a successful transition. A 3PL that has operated in the market for many years can help with a range of challenges – from legal guidance, like how to establish a business entity in the new market, to strategic logistics advice, like how to design a distribution network with adequate freight and warehouse capacity.
301 tariff exemptions: be aware of the opportunities
Returning to the Biden Administration’s expansion of 301 tariffs, exemptions from these new tariff rates may be possible for certain categories of goods, including certain machinery and solar manufacturing equipment. New details on potential exclusions include HTS codes and product descriptions for the exclusion categories.
U.S. companies that import from China should carefully review the U.S. Federal Register notice (particularly Annex B and Annex C) to determine if their imported products might qualify for an exclusion, thus avoiding this significant duty payment. Check the notice to determine whether any increased or new tariffs might apply to your goods, too.
If there’s a significant impact to your business, there’s an opportunity to submit comments to the U.S. Trade Representative to ask that your class of goods be excluded from the final list. If you have any questions about whether your products might be eligible for an exclusion, about the request for exclusion process, or whether your goods are impacted by the new tariffs, seek help from an expert. Certainly, Dimerco freight specialists are available to discuss your specific challenge.
Going Forward
Looking ahead, there is little doubt that China will retaliate with its own trade protection measures. What those will be and how that will impact supply chains in Asia-Pac remains to be seen.
In this current and somewhat unpredictable trade environment, it helps to have an expert guide on Asia-Pac supply chains that can provide insights and help you make decisions. With a long history operating logistics networks in Mainland China (1991) and even longer in Asia-Pac (1971), Dimerco has local market freight shipping and customs specialists with the know-how to navigate through these difficult challenges. For U.S.-based companies, we combine our Asia-Pac logistics expertise with nearly 50 years of operating experience in the U.S. to provide sound guidance.
Don’t row the boat alone. Reach out to Dimerco to start a discussion.
