Trump Administration Denying More Tariff-Exemption Requests

February 03, 2020

Editor’s note: Denying exemptions to China tariffs is good news. US companies have a greater chance to open new production lines and capture these markets when exemptions are denied. Make it here and there is no tariff risk.

Officials say the levies encourage U.S. companies to build or source products domestically

[Anthony DeBarros and Josh Zumbrun | February 3, 2020 | WSJ]

WASHINGTON—Trump administration officials are granting fewer exemptions to tariffs on Chinese imports, with the approval rate recently plunging to 3% in the third round of levies from 35% in the first two, according to a Wall Street Journal analysis.

Requests for exemptions have been made by more than 4,500 companies, which typically say they have no viable or cost-effective alternatives to Chinese products. Many companies seek more than one exemption. For just the fourth round alone, more than 8,700 requests for exemptions were made by Friday, the filing deadline.

HealthWay Family of Brands filed for 11 exemptions on electronic and other parts it imports from China to build air cleaners in Pulaski, N.Y. When the U.S. Trade Representative denied all its requests, the company was forced to lay off eight of its 48 workers and sideline plans to expand, said Vinny Lobdell Jr., the company’s global president.

“We were set to build a $2 million expansion,” said Mr. Lobdell. “We had looked at bringing 30 to 40 more jobs to the area as the Intellipure product line was growing.”

The USTR didn’t respond to a request for comment on its reasons for denying tariff exemption requests.

The Trump administration has defended the tariffs, saying they are needed to pressure China to change practices that are unfair to U.S. businesses and can encourage U.S. companies to build or source products domestically.

Tariffs were imposed in four tranches and are still in effect despite the Jan. 15 trade deal with China.

The first two rounds of levies went into effect in July and August 2018. They impose 25% tariffs on roughly $50 billion in goods including plastic parts, industrial products and electronic components. The USTR granted about one-third of the exemption requests for these products.

“These are particular valves or pieces of technology that we just can’t get anywhere else,” said Chris Rogers, a supply chain analyst with trade data analysis group Panjiva Inc. He said that may have led the USTR to believe it could “genuinely hurt these companies” if the exclusions weren’t granted.

The third round of tariffs, imposed in September 2018, imposes 25% tariffs on roughly $200 billion in imports. These cover goods including furniture, luggage and wood products that are readily available from sources outside China, which Mr. Rogers said likely accounts for the relatively small number of exemptions granted—meaning that if importers claim that they can’t find other sources, that “just isn’t going to fly.”

The fourth and final round of tariffs was imposed in September 2019, with 15% levies on roughly $120 billion in Chinese imports including apparel, plasticware and sporting goods. The U.S. agreed to cut the tariffs on these items to 7.5% under the trade deal.

Overall, more than 52,700 exclusion requests have been filed to the USTR, which has ruled on about 26,300 of those. In a Federal Register notice last August, the USTR estimated that each submission takes 2.5 hours for staff to evaluate.

One company, Minnesota-based Arrowhead Engineered Products Inc., has filed more than 10,000 requests under the third round of tariffs. So far, the USTR has approved six of those and denied about 5,300. The company, which had received approvals for 35% of 474 requests in the first tranche, declined to comment.

One frustration for business owners is that the USTR doesn’t provide any explanation for its decision.

“I have to tell you, I was really shocked,” said Crystal Morris, CEO of Tampa, Fla.-based Gator Co., which imports speaker stands, guitar cases and other audio accessories from China. Her company filed nine requests under the third tranche. All were denied.

“I thought we had put together a good appeal,” she said. “It really talked about the fact that our products are for musicians and are going into schools, and education. We were pretty disappointed that they were denied because obviously it’s hurting our business with margins and it’s causing us to push some price increases.”

Jonathan Gold, the vice president of supply chain and customs policy for the National Retail Federation, said such complaints are common.

“There’s no insight into how or why USTR is making decisions on exclusions. It goes into a black box and there’s no rhyme or reason that anyone can figure out into how the decisions are being made,” Mr. Gold said.

Some companies, still wrestling with large tariff bills, have been frustrated by the perception that the phase-one trade deal with China has resolved the uncertainty facing their businesses, Mr. Gold said.

“It’s not the case, not for those companies that continue to face the tariffs. We still have tariffs on $370 billion worth of imports from China,” he said.

The relatively high rate of exemption approvals for the first two rounds of tariffs encouraged many companies to seek relief, said attorney Jessica Wasserman of Greenspoon Marder.

“So many companies that decided to go through the expense and time of filing did so on the basis of the approval rate of the first tranches, which were around 30%, only to find that the approval rate for later tranches has plunged to about 3%,” Ms. Wasserman said. “This is very frustrating and seems unfair, especially for smaller businesses.”

Mr. Lobdell Jr. of HealthWay Family of Brands said that the added tariffs cost his company about $700,000 in 2019. Now, with the exemption denials, he’s considering shifting some manufacturing to a Chinese factory where it has a partner.

“When you set a supply chain up like that, it’s just very hard to just shift and move and set up a supply chain somewhere else,” he said.

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