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CBP's 'Hands Tied,' So NAFTZ Engaging USTR on Section 301 Tariffs for Some US FTZ-Manufactured Goods

National Association of Foreign-Trade Zones President Erik Autor is set to meet with officials at the Office of the U.S. Trade Representative in the coming weeks to discuss a quirk in foreign-trade zone filing requirements that’s resulting in the unfair application of Section 301 duties, he said in an Aug. 21 interview. Autor seeks to educate USTR on how tariffs apply to FTZ goods, in the hopes that the agency will amend Section 301 implementation language related to zones that CBP says leaves it with no choice but to sometimes collect the tariffs on inputs that sometimes aren’t even Chinese.

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The issue stems from differing language between the presidential proclamations implementing Section 232 tariffs and the USTR notices announcing Section 301 duties. The Section 232 proclamations on steel and aluminum, as amended at the end of April, say products aren’t subject to Section 232 tariffs “merely by reason of manufacture in a U.S. foreign trade zone.” But USTR’s Section 301 announcements included no such provisions, nor did its announcements on Section 201 safeguard duties on solar cells and washing machines, which are also affected by the problem, Autor said.

Senior CBP officials have told Autor their “hands are tied” and they must give meaning to that difference. CBP “feels like they’re between a rock and a hard place, because on one hand they have explicit language in one trade action exempting FTZ manufactured goods, and in the other there’s silence.”

The tariffs are being applied on certain non-Chinese goods because of a Census Bureau requirement that, for goods manufactured in FTZs, the country of origin must be declared on entry documentation as the country of origin of the highest-value input. If that’s China, and the finished good also enters under a tariff subheading on the Section 301 list, CBP sees the substantially transformed, U.S.-origin good as subject to 301 tariffs and assesses the 25 percent tariff on the full value of the foreign inputs. That’s true even if some of those foreign inputs aren’t Chinese. For example, if a water pump is manufactured in an FTZ, using a Chinese motor that is the highest-value input but also inputs from other countries that may even make up the majority of the value of foreign inputs, the entire foreign-origin portion of that water pump comes under Section 301 tariffs on China.

Though a CBP official in June said publicly that a forthcoming CBP ruling would resolve the issue (see 1806220054), Autor has been told “there is no ruling on this.” CBP “has told us they’re waiting on USTR to fix this problem.” According to Autor, “The solution is easy. All USTR has to do is take that one sentence included in the Section 232 proclamation, and send out a Federal Register notice to that effect, or guidance to CBP, and CBP will stop collecting these duties.” CBP did not immediately comment.

“We can’t emphasize enough that the source of this multimillion-dollar problem is the quirk in the entry process that is causing finished products manufactured and substantially transformed in a U.S. FTZ to be identified as products of China if the highest-value foreign component is of Chinese origin and the [Harmonized Tariff Schedule] number of the finished product also happens to be on the trade-remedy action list,” an NAFTZ spokesman said.

Autor tried to explain as much in Aug. 20 testimony at ongoing Section 301 hearings related to a new, third list of subheadings with wide-ranging product coverage (see 1808210005). “We appear to be making progress with help from the Hill. We’ve briefed the trade staffs at Ways and Means and Finance. They understand the problem, and briefed other members on the Hill. They’re encouraging USTR to meet with us and it looks like we may have a meeting in a couple weeks. Hopefully, we can get this issue resolved,” Autor said in the subsequent interview.

NAFTZ is in particular “working to dispel any misunderstanding about the way FTZs work, particularly regarding the collection of trade remedies duties, in the context of 301, to help to resolve this problem,” Autor said. If a good is “made in the U.S. in an FTZ, it should be treated like a product made in the U.S. outside an FTZ. If it’s made outside an FTZ, the only product paying additional duties is Chinese-origin products subject to 301. A product made in the U.S. outside a zone is not considered to be Chinese, merely because the highest-value foreign input happens to be Chinese. The same principle should apply to products made in the U.S. inside a zone,” he said.

But the effort isn’t a simple one. NAFTZ needs to overcome misunderstandings at USTR as to how FTZs work. The trade group is “not asking for exemptions for products on the list,” and the FTZ process ensures trade remedy duties are collected. “This isn’t a loophole to get around Section 301.” But USTR appears “dug in on any exemptions to 301. Any exceptions that are going to be granted are going to be few and far between, in my sense,” Autor said.