The PortCast: Tariff Engineering and the Trade War

by | Feb 22, 2019 | Behind the Scenes, China, Compliance, International Fun Facts, Logistics

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Podcast Transcript:

Wade Carlson:                     

Forget the trade war; China’s got bigger problems                        

Hey, everyone. Welcome to the PortCast, where we speak logistics.

Since the global financial crisis China’s economy is tremendously slowing down. They’ve been acquiring significant amounts of debt, mostly used for public infrastructures such as roads and bridges. And yet, the health of the Chinese economy is further impacted due to a 9% dip in the Chinese renminbi against the dollar, and an inflated real estate market. While this is going on, US exports are up 16% in the month of October. This and more, for Dedola Global Logistics in Long Beach, California. I’m Wade, this is the PortCast, and we speak logistics.

Wade Carlson:                                  

So why would you transform a van to a cargo vehicle, and why would you transform a shoe to a slipper? Well, the reason is duty rates. Converse, you know the sneakers, they put a little piece of felt on the bottom of their soles. Okay, what does this do? It transforms the shoe to a house slipper and decreases the tariff from 37.5% to 3%. Very smart.

Wade Carlson:                                  

I had the opportunity to speak to Mr. Bob Silverman, an attorney in New York, New York. He is an expert on the subject of tariff engineering and has been practicing international trade law since the 1970s.

Wade Carlson:                                  

Okay, so wait, first of all, do you go by Robert or Bob? Because someone said, Bob.

Bob Silverman:                 

I’m a Bob.

Wade Carlson:                                  

So Ford, they have a 25% duty on their imports, right? But they’ve been able to save about 250 million dollars over the past 15 years on the Ford Transit. So it’s a van tax or a chicken tax?

Bob Silverman:                 

Yeah, I’m very familiar with the case. If you import trucks into the United States, the duty rate is 25%.

Wade Carlson:                                  

Okay.

Bob Silverman:                  I

f you import passenger vehicles into the United States the duty rate is 2.5%. Basically, import it as a passenger vehicle at 2.5%, and then they would reconfigure it after it was imported into something that carried more cargo than passengers so they would only pay 2.5%.

Wade Carlson:                                  

Is this like a prime example of what tariff engineering actually is?

Bob Silverman:                 

There’re lots of different options to achieve what I would call tariff engineering. You are allowed to structure your product or your transactions to minimize your customs duties. As long as you make the proper declaration at the time of entry and you’re transparent, you’re not hiding things, then that’s all okay. Let’s go back a little bit to like 1911.

Wade Carlson:                              

Okay.

Bob Silverman:                 

There’s a supreme court case, United States vs. Citron, where a woman bought a pearl necklace overseas, and the duty rate on pearls was much lower than the duty rate on necklaces. So, she unstrung it overseas. After she brought it into the United States, she put it back together again as a necklace. The supreme court of the United States said that’s all legitimate; you can do that. So there have been cases over the years, many, many cases over the years, where people have done that. They’ve imported guns in pieces and then put them together in the United States. They imported sugar, and they call it “grain” to get a lower duty rate.

Wade Carlson:                                  

Wow.

Bob Silverman:                 

This Ford thing is just another example of that.

Wade Carlson:                                  

If someone does this the wrong way, how much trouble could they get in?

Bob Silverman:                 

If you don’t make the right declarations to customs, then you could be in big trouble. You could have potential criminal exposure.

Wade Carlson:                                  

Okay.

Bob Silverman:

And then there’s exposure for civil penalties, which are equal to the domestic value of the goods.

Wade Carlson:                                  

Wow.

Bob Silverman:                 

It could be a lot. A lot of times that’s why if we’re gonna do something like this we’ll go to customs, and we’ll say, “Hey, this is what we’re doing. We’d like to get a binding ruling from you on that.” And they will give you a ruling, that’s it. They have to classify everything based on its condition as imported and not on what you do to it afterward. Theoretically, if you take like a gold statue, there’s an old case also on a guy was importing lead. He fashioned it in the shape of statues, so he put it in as artwork. Then afterward he melted it all down into lead. So what is it, a statue or lead?

Wade Carlson:                                  

Yeah, wow.

Bob Silverman:                 

You have to classify it based on its condition as imported. Another thing that people can do, you can change your country of origin. You can’t take a Chinese product and just send it to Thailand and then bring it into the United States and say it’s a product of Thailand, that’s a crime. What you can do is you can do part of the processing in China, and part of the processing in Thailand, and if you do enough of the processing in Thailand you’ve got a product of Thailand. Maybe you get duty free, or you avoid the China sanctions or China [inaudible 00:05:46] duties. You just have to be smart and do it aboveboard.

Bob Silverman:                 

Another thing you can do is you can take advantage of the value law. Let’s say goods are sold from factory to a trading company at like 100. Then the trading company sells it to the importer at 120. If you set it up correctly, your dutiable value can be 100, if you don’t set it up correctly your dutiable value can be 120. That’s also tariff engineering.

Wade Carlson:                                  

Interesting, especially with the trade war happening this stuff is probably occurring more and more.

Bob Silverman:                 

Absolutely.

Wade Carlson:                                  

So what is the first step for someone to take? Should they consult a broker about it or actually like an attorney?

Bob Silverman:                 

Brokers process thousands of thousands of entries. They don’t usually have a lot of time to do this kind of stuff. There are brokers who do some consulting work who might be able to do this, but attorneys who specialize in this field, this is our specialty; this is what we do.

Wade Carlson:                                  

Well, that was eye-opening. Sculptures become lead; sugars become grain; a lot of transformations. And this is saving companies big time. Let’s go ahead and shift gears. Well, it looks like President Trump and Chinese President Xi Jinping have begun negotiations. This announcement came out of a working dinner during the G20 Summit in Argentina. The White House issued a statement delaying the proposed 25% tariff increase on a wide variety of Chinese imports, and meanwhile, the 10% additional tariffs on the third list of HTS codes remain unchanged.

Wade Carlson:                                  

So this trade war, it’s been going on for months now and seems like there’s going to be some changes. There might be an end to this coming up soon, but the question today is: is there a real winner in the trade war and who has the upper hand? Speaking more about this, we have Stephen Dedola, who is CFO and CTO of Dedola Global Logistics. Stephen, what do you say?

Stephen Dedola:                            

I get this question a lot. What do I think about the trade war? The thing that comes to mind when I think about trade and China is the story of Hong Kong. This applies to Macau too, but specifically Hong Kong and the deal that the Chinese made with Great Britain for the lease of the island of Hong Kong. They did this in it was the late 1800s. The terms of the lease gave Great Britain a lot of latitude to do what they would with Hong Kong, and what they did was turn it into a thriving financial Mecca that it remains today, although Shanghai is stealing some of its glory with all the buildup that’s taking place on mainland China now. But, basically China got Hong Kong back after almost 100 years. Why is that important?

It was a great deal for China, for sure. It was a great deal for Great Britain, too. It was definitely a win-win. But, what Great Britain was able to do at that time China probably could not have done. But China as a government, and I’d say the Chinese people, having multiple thousand years of history, tend to think of things in the long term. That may be a generalization, but let’s just say that if you go by the Macau and the Hong Kong deal alone you can see it that way.

You have two things. You have a country that has been mercantile for longer than most western societies have even existed. It’s in their blood. It’s in their DNA, as they say. So they’re really good at that. They’re good at making deals. They may even be able to teach Donald Trump a few things, who knows. The point is that they’re no slouches. And then they have this long view of things coming from these thousands of years of history and continuity of history. Then you add to it that you have a government that is not concerned about its ability to make long term plans because they have no elections. They are still pretty much an authoritarian state. The communist party is still in control. There’s no sign that that’s going to change anytime soon, definitely not in the next four to eight years as compared to the United States, where that’s the system. We change our governments on a regular basis. And in fact, most people who get into office are there for maybe a couple years before they’re campaigning for their next election or the next election process. In case of the midterms, you’ve got presidents who are having to worry about whether or not their party is going to be voted out of office on the next go around.

In contrast, the people in power here are absolutely concerned with optics and what the impact of this or that policy are going to have on their constituents, their base. Their hardcore base, their middle core base, the people they’re trying to woo from the other side to come and support them. Now, even if we’re not talking about the Trump era, which is so divisive, where people are almost 50/50 either love him or hate him, you definitely have a situation where the Chinese will look at this and say, “We can wait this out.” So there’s no time pressure, and there is no political pressure. Who wins a war of attrition, which is what all trade wars are? The person who has something to lose in the system that changes players on a regular basis, or an entrenched group who used to playing the long game? My feeling is that China has the advantage.

Wade Carlson:                                  

Well, it seems as though China may have the upper hand on this one, but we will take this one step at a time. Thank you, as always, for Dedola Global Logistics in Long Beach, California. I’m Wade and this is the PortCast, where we speak logistics.

 

 

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