Despite a volatile, uncertain trade environment, you can take steps to protect your US market share

As a result, many businesses are relocating their manufacturing operations from China to other Asian countries, primarily Taiwan and members of the Association of South East Asian Nations (ASEAN) region (Figure 1).

Some exporters believe that obtaining a certificate of origin for their finished goods from a third country such as Taiwan will keep them safe. But regulatory scrutiny of imports containing parts made in China has never been higher.

Shipping finished goods that contain China-made parts from Taiwan to the US can entail significant risks. A wise strategy includes proactively understanding these risks, assessing your potential exposure and taking action to protect your access to US markets.

Shipping finished goods that contain China-made parts from Taiwan to the US can entail significant risks. A wise strategy includes proactively understanding these risks, assessing your potential exposure and taking action to protect your access to US markets.

THE RISKS FOR TAIWANESE EXPORTS TO THE UNITED STATES

US authorities may accuse Taiwanese exporters—and the US importers they work with—of trying to evade duties on China-made finished goods or parts, contrary to one or more trade laws. The consequences can be harsh, including high duties and penalties, blocking or limiting access to US markets and, in some cases, criminal charges and possible prison time. These trade laws include:

• Country-of-origin inquiry or penalty action by US Customs and Border Protection. US Customs and Border Protection (CBP) may investigate the accuracy of the country-of-origin (CoO) declarations for the goods during importation into the US. In particular, CBP will check whether the production or assembly processes in Taiwan "substantially transformed" the China-made parts enough for the finished goods to have originated in Taiwan for purposes of CoO duties. If not, CBP may demand underpaid duties, assess substantial penalties and, in some instances, detain, exclude or seize the goods.
• Scope inquiry by US Department of Commerce. The US Department of Commerce may conduct its own CoO assessment, using its own rules, if the China-made parts are subject to anti-dumping (AD) and countervailing duty (CVD) actions or if the finished product would be subject to AD/CVD duties (if the country of origin were China). The Department of Commerce's rules do not rely only on "substantial transformation" or interpret the phrase the same way that CBP does. Even if a CoO is correct for CBP purposes, the Department of Commerce can issue an apparently conflicting determination and rule—even retroactively—that the goods are subject to China AD/CVD duties.
• Anti-circumvention inquiry by US Department of Commerce. Even if both CBP and Department of Commerce CoO rules deem specific goods as originated in Taiwan, the Department of Commerce can inquire whether the goods otherwise circumvent US AD/CVD duties. If it determines the Taiwan operations were minor and/or would otherwise "circumvent" those duties in the future, it can enter an adverse finding.
• Anti-evasion inquiry by CBP. Under the US Enforce and Protect Act (EAPA), CBP may investigate whether Taiwanese goods are "evading" AD/CVD duties. In most EAPA cases, CBP checks whether the goods were actually produced in Taiwan, not merely trans-shipped through the country. Even before it decides whether the importer made any false statements, CBP may demand AD/CVD cash deposits on entries made during the investigated period. According to CBP's annual Trade and Travel Report for 2018, CBP initiated 20 EAPA investigations during the previous two years and conducted 18 onsite audits of producers in Asia, thus preventing the evasion of US$50 million "in AD/CVD duties annually." ¹

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WHAT CAN YOU DO TO MANAGE THESE RISKS?

If goods you produce contain significant China-made parts, US authorities may decide they do not originate in Taiwan or otherwise that they should be subject to duties on goods from China. This risk usually increases if your exports increase, especially when there is a parallel decrease in exports from China, or if your production facility is a subsidiary or affiliate of a Chinese company.

Know your risk based on your particular circumstances

The first step toward managing these potentially significant risks is to get a clear understanding of your company's exposure.

Start by assessing:

1. The origin and value of all of your inputs and components. It is prudent to involve experts to assist in performing this technical analysis
2. The relative value and importance of your China-made inputs
3. The nature and extent of your production or assembly operations in Taiwan
4. The tariffs applicable to these parts or goods if they had been exported directly from China, including normal most-favored nation (MFN) duties, special duties from the trade war— including under Section 301 (unfair practices) and Section 232 (national security threats)—as well as anti-dumping duties, anti-subsidy countervailing duties and Section 201 duties (safeguards against injurious import surges)

Take action to eliminate or mitigate your particular risks

Depending on your circumstances, these actions can include:

• Obtaining a CBP country-of-origin ruling where existing precedent is inapplicable or unclear. This generally takes approximately one month and is binding on the facts presented, but is also public.
• Ensuring adequate recordkeeping. Your production, accounting and shipping recordkeeping systems should enable you to trace particular exports of finished goods through production or assembly from the parts and components purchased. It is advisable to involve expert consultants for this exercise.
• Requesting a US Commerce Department advisory opinion. If US domestic industries may claim that your goods are circumventing US duties, then this type of request can give you some assurances of the US Department of Commerce's likely views.
• Conducting EAPA due diligence. This can include assessing the sensitivity of the exports, recent trade patterns and the nature of your operations in the context of evolving CBP precedents, especially as EAPA investigations involving duty evasion allegations against assemblers throughout Asia have increased significantly.
• Adjust your export or assembly operations. If other measures do not sufficiently address your risks, then make appropriate changes to your production arrangements, including enhanced or more extensive production operations, and/or changes to how you source inputs.

WAITING FOR THE US-CHINA TRADE WAR TO END IS A RISKY STRATEGY

No matter how the current US-China talks conclude, it is very likely that this bilateral trade relationship will remain volatile, with US regulators continuing to scrutinize goods containing China-made parts.

The controversial "Made in China 2025" strategic plan for China's dominance in key sectors may gain traction over the next five years and add to tensions. If the current US president is re-elected in 2020, this administration's trade policies may continue at least until 2024. And with China's domestic consumption projected to roughly double in the next ten years, the powerful incentive for Chinese and other global companies to increase capacity in China could have unintended consequences for global markets. Unexpected drops or capacity overshoots in China could result in surplus exports distorting global markets, resulting in a continued resort to tariffs against Chinese goods and stringent scrutiny of third-country products containing China-made parts.

Therefore, prudent exporters must plan for this possibility, rather than waiting and hoping for the US-China trade war to blow over.

¹ CBP FY18 Trade and Travel Report

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