As Nite Ize legal operations manager Kelly Von Letkemann sifted through legal decisions to learn how to best persuade the federal government to exempt tariffs on products the Boulder company makes in China, some actions made sense. Some made no sense at all.
She pointed to Sea Eagle Boats, for example. The family-owned New York company received a tariff exclusion on its inflatable kayaks. It also was granted one for a set of paddles, although not one for a similar set used on the same exact kayaks. The applications were nearly identical but one paddle application “failed to show” how it would cause economic harm to the company, according to a U.S. Trade representative letter filed as part of U.S. Section 301 Tariff actions.
As businesses like Nite Ize, which makes outdoor and travel gadgets, scramble to swallow the impact of a new round of tariffs on Chinese imports that go into effect Sept. 1, confusion abounds. Industry trade groups and organizations like the World Trade Center Denver are trying to help small and large firms figure out whether their Chinese-made products can be excluded from U.S. tariffs on $550 million worth of Chinese imports.
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But as Von Letkemann and others found out during a recent World Trade Center Denver seminar on exclusions, there’s no magic standard.
“There is no clear pattern, no rhyme or reason,” said Luke Duvall, who guided curious businesses through the exclusion application process. He’s a licensed customs broker and director of sales for Air Tiger Express Companies. “Certainly we’re trying to figure it out. I think everybody is.”
The China trade war began in earnest last year when the first set of tariffs went into effect. The Trump administration aimed to quash intellectual property theft and has increased taxes over the year to discourage American companies from doing business with China. Businesses have had to readjust, with some looking for manufacturing alternatives or successfully petitioning to get their products off the tariff list. But now, all products that didn’t have a tariff are included in the latest round — called List 4 — which was split into two start dates beginning Sept. 1 with the rest (toys, clothing and consumer goods) starting Dec. 15.
China-US trade war: The tariffs
July 6, 2018: Additional 25% duty on $34 billion on List 1 imports
August 23, 2018: Additional 25% duty on $16 billion on List 2 imports
Sept. 24, 2018: Additional 10% duty (increased to 25% on June 15) on List 3 imports
Aug. 1, 2019: 10% duty on $300 billion of imports with List 4A starting Sept. 1 and List 4B on Dec. 15. (Due to the new Phase One trade deal with China in December 2019, List 4A was partially rolled back and List 4B was suspended.)
The trade war continued to escalate on Friday as China said it would match Trump’s latest tax with its own tariffs on $75 billion worth of American goods, including one of Colorado’s top exports: pork.
The impact on Colorado is uncertain, but elected officials like U.S. Sen. Michael Bennet, a Democrat who is running for president, say they’ve been hearing from constituents.
“No one wins in a trade war, and President Trump’s disastrous policies are inflicting lasting damage on Colorado’s farmers, ranchers, workers, and businesses,” Bennet said in an email. “Instead of reckless tariffs, the president should be doing the hard work of building coalitions to put real pressure on China and create a strategy that expands opportunity for American farmers, ranchers and businesses. Until that happens, it will be Coloradans — and Americans across the country — who pay the price for Trump’s self-inflicted trade war.”
At a recent roundtable hosted by Manufacturer’s Edge, Republican U.S. Sen. Cory Gardner talked about tariff exclusions but acknowledged the process may be overwhelming for a small business, said Jessica Cowden, Director of Marketing & Communications for Manufacturer’s Edge.
“He mentioned that his father’s business in Yuma had been affected by tariffs and that his father was considering filing, but lacked the time and resources to do so,” Cowden said. “Otherwise, the other manufacturers at the table all indicated that they were being affected, but none of them mentioned having applied.”
Gardner’s staff didn’t respond to questions by Friday.
But reaching out to local elected officials has been of little comfort to companies trying to figure out whether to swallow the increased taxes or fight them by wading through the bureaucracy and applying for an exclusion.
“Most everybody that imports products from China has applied for an exclusion,” said Russ Rowell, General Manager for Kelty, a Boulder-based maker of outdoor and camping gear. “We started looking at where else we can manufacture, but there are some things we can’t physically move (out of China) that fast. We’re going to get hit.”
Kelty and its parent company, Exxel Outdoors, makes millions of sleeping bags each year, mostly in China, Rowell said. They’re sold in stores like Walmart, Dick’s Sporting Goods and Target. In mid-December, the 10% tariff kicks in and the price of sleeping bags will have to rise at someone’s expense.
The company has filed for tariff exclusions on sleeping bags and other products, but they’ve yet to be granted or denied. While waiting, Rowell said he’s doing what he can to mitigate price increases by working with Chinese manufacturers to absorb some of the hit since China devalued its currency so manufacturers aren’t paying as much. Retailers would likely pay the rest, which means the extra cost is passed on to people who buy the sleeping bags.
“It’s going to be at 10% in December, but that’s another thing,” he said. “It’s a moving target. We never know if it’s going to be there or be at 25% so it’s hard to strategize.”
Getting a tariff exclusion
If you look at it from a step-by-step perspective, the process to apply for a tariff exclusion is relatively simple.
- Create an account with the U.S. Trade Representative.
- Figure out the product’s U.S. Harmonized Tariff Schedule, or USHTS, code (here’s a handy search tool)
- Have clear answers and provide support to these questions: Can the product be made only in China? What is the economic harm of tariffs on the company? Is the product beneficial to China’s former “Made in China 2025” campaign, which the Trump administration says is a way for China to gain U.S. intellectual property.
- Deadline to apply for an exclusion for List 3 is on Sept. 30, 2019.
- The window to apply for an exclusion for List 4 has not yet been announced.
There’s definitely more interest in World Trade Center seminars like the recent one on tariff exclusions.
But while the idea of moving manufacturing out of a country that isn’t interested in protecting American IP is appealing, attendees expressed concerns about the reality of moving out of China. Options like Vietnam come with stories that the country is actually a front for Chinese manufacturing.
Other countries have weaker infrastructure, so even if a non-Chinese factory is willing, washed-out roads, for example, could lead to interminable delays.
Martin Vieiro, the trade center’s global business services program manager, said manufacturers are dealing with an environment that is more uncertain than they’re ever had to deal with.
“At first companies felt they could absorb the costs, when it was like 10%-ish. And then once they started to go to 25%, they started starting to talk to distributors about sharing the burden, they’re starting to pass costs on to customers,” Vieiro said. “I think we’re starting to see now that there are certain companies that are really starting to take a hit, like Home Depot, which is a good example of a company that’s really struggling. We’re watching it.”
During public-comment periods, businesses can view what items are being considered for a tariff list. Sometimes that can alert a U.S.-based factory already making the product in the States. Other times, industry organizations and companies fight to keep products off the lists before a list becomes final. Sometimes it works.
During a public comment period last September, the Outdoor Industry Association and the maker of Bell Helmets was able to successfully remove bicycle helmets from the tariff list after citing safety concerns. But the helmets showed up on the latest tariff list.
“We made the case that bikes, snowboards and helmets should be exempt, not because of limited (manufacturing options) but it’s a safety issue. The administration agreed,” said Rich Harper, the OIA’s Manager of International Trade. “Fast forward a year and helmets are back on the list. That’s unfortunate. We made the petition again, but they still ended up on the fourth list. So despite that the administration agreed they should be removed last year, they’re now subject to the tariffs. It’s a head-scratcher.”
OIA had a webinar on exclusions last month to help members wade through the process of applying for an exclusion. Harper said his team is also keeping track of applications and watching for any that impact the outdoors industry.
Harper recommends that any company be as clear as possible in their exclusion applications since one win for one company means a win for the industry.
“Our advice to members is you want to be as specific as possible with your product descriptions. Be as clear as possible on the impact on your business, job growth, new product development and your ability to stay afloat and why there are no sourcing options other than China,” Harper said. “There’s no magic formula but if you tell the story, explain the situation and why you need to manufacture in China, you’re going to put yourself in the best situation possible.”
Valuable tip: If a product, like sleeping bags, does win an exclusion, then all sleeping bag makers qualify for the tariff exemption.
Helping out competitors isn’t a sore spot for a company like Kelty, Rowell said.
“What we hope is that it’s not just us asking for an exclusion on sleeping bags but also Northface and REI. Everyone is pursuing exclusions in their categories. There are people fighting for backpacks and fighting for tents. We felt they got that focus covered so we’ll focus on sleeping bags,” Rowell said. “I look at it as (tariffs are) going to hurt the end consumer. And even though we’re competing for that consumer, this is for the greater good, definitely.”
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What happened with the paddles?
Sea Eagle Boats applied for 18 exclusions as soon as it could, back on June 30. It received seven of them. Both kayaks made it through, but not both paddles.
John Hoge, a Sea Eagle partner, isn’t too concerned about the second paddle. On Aug. 8, paddles made it into the federal registry as exempt from the China-import tariffs.
Reads the official federal ruling: “Pursuant to the product exclusion process, the U.S. Trade Representative has determined that the additional duties … shall not apply to the following particular products… (3) Kayak paddles, double ended, with shafts of aluminum and blades of fiberglass reinforced nylon.”
“Since we got the exemption for the paddles anyway, it’s not super important which one they chose,” said Hoge, who is now waiting to see if duties Sea Eagle paid on the excluded items will actually be refunded. “The language of the exemption doesn’t matter too much. What matters is the federal registry.”
Sea Eagle plans to apply for more exclusions. But after receiving the exclusions on the kayaks and paddle, he’s not as concerned as he had been.
“There’s no magic key but in general, you want to show that your products align with the administration’s priorities in that they don’t represent anything in the ‘Made for 2025’ plan,” Hoge said. “As much as I like kayaks, they are not a tool for world domination.”