List 4 China Tariffs—A Possible Exit Strategy

Under Section 301 of the Trade Act of 1974, the US has the right to retaliate against unfair foreign trade practices. Over the last year the US has slapped additional tariffs of between 10 and 25 % on almost all goods of Chinese origin. As its name implies, these tariffs are on top of the normal customs duties.

The tariffs have been rolled out in various Lists organized on an HTS basis. The first three Lists hit goods with a combined $250 billion in annual imports from China.

The 4th and final List assesses additional duties of 15% and covers the remaining $300 Billion worth of annual Chinese imports, many of them apparel and other consumer goods. It has been bifurcated into two parts – List 4A came into effect on September 1 while List 4B will be effective December 15. Note–the 15% tariff may be increased to the now-standard 25% tariff level.

Exclusion Requests: Three Month Window

The USTR has established procedures whereby importers and others (trade associations, Chinese producers) can petition for exclusions from the China 301 tariffs. The exclusions function as exemptions.

The window to file such requests for the first three Lists has closed. But the period to request an exclusion from the List 4A tariff hit has just been announced.

Stakeholders will have from October 31 to noon on January 31, 2020 to submit exclusion requests via the USTR web portal. If granted, the exclusions are good for a one-year period but they have retroactive effect, as well, so importers will want to take steps to protect their rights (suspended liquidations, protests) in the face of the steady liquidation of entries.

Request Process

The request process is very nuanced and has been altered slightly from the List 3 process. For instance, the exclusion request must be made on a 10-digit HTS basis rather than the former 8-digit approach. Also note that this is a public process, with open access to all of the filings. There is a provision for the protection of business confidential information, such as purchase history. Also know that domestic competitors can file negative comments.

We Can Help

ITC has filed List 3 requests for exclusion. Interested List 4 stakeholders can contact us for more information and assistance.

Trimil SA v. United States — CIT Finds Advertising Expenses and Trademark Royalties Non-Dutiable

In December, 2019 the Court of International Trade (CIT) issued its decision in Trimil SA v. United States, Slip Op. 19-161 (12/17/19). This promises to be a landmark decision regarding the non-dutiable treatment of advertising expenses and third party trademark royalties. The case was brought by a company involved in the importation of Armani apparel. The court closely examined two sets of agreements that provided for (1) design and advertising services and (2) for a trademark license. The agreements were between Trimil and a pair of related parties. Importantly, the licensors of the trademarks were unrelated to the apparel factories which were the sellers of the imported merchandise. In each case, the fees would be based on Trimil Corp.’s future U.S. sales.

The case did not go to trial but was decided in favor of Trimil by summary judgment. Trimil had conceded that the design services constituted dutiable assists. The court held that the advertising fees and the trademark royalty fees paid by Trimil were not dutiable—they did not comprise a part of “the price actually paid or payable” (the PAPP) for the imported merchandise, and did not fit within one of the statutorily authorized additions to the PAPP.

In the first instance, the fees were not paid to the seller nor were they for the benefit of the seller, as defined by statute, 19 U.S.C. § 1401a(b)(4)(A). In the CIT’s own words, the meaning of the phrase “to or for the benefit of the seller” should be given a narrow meaning.  The court accepted Trimil’s position that the fees fell “squarely within the context of post-import transactions.” Moreover, in the case of the royalty fee, the fees were not a condition of the sale, which is a criterion for dutiable royalty status. The court pointed out that the presence of legally enforceable condition could not be inferred where an express condition was absent from the contract. The fact that the non-payment of the royalty might lead to a halt in production does not make the royalty payment a condition of the sale of the imported goods. The court accepted Trimil’s argument that the trademark royalty fees were a “selling expense associated with the clothing’s resale value after importation into the United States.”

Impact of the Trimil Decision

First, the most striking thing about the case is that the government neither appealed the loss nor, at the time of this writing, issued a Limiting Treasury Decision.

So, as of now, the decision stands as the last word. Of course, the decision may spawn later court challenges by the government seeking to re-litigate these issues or by importers seeking to challenge other CBP interpretations.

This decision makes happy importers who think that CBP should interpret the statutes strictly. But importers have been reluctant to challenge CBP and shoulder the considerable expense of taking a case to trial. Thus rarely does the CIT hear an important valuation case and when a decision is reached the trade world takes notice. Perhaps importer passivity has emboldened CBP to unfairly apply Customs rules and regulations and maybe this case, a win for the importer, will inspire the customs Bar to challenge CBP more often. Importers may challenge other weak positions CBP has taken in recent years – see numerous criticisms to the pre-determined end use test for origin enunciated in Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (2016).

The Trimil case also opens up a planning opportunity.. Importers can rely upon the Trimil case to artfully draft agreements to avoid dutiable value if fees for advertising expenses and trademark royalties are paid to third party licensors and the standards set out in Trimil are observed.