US-China trade war: Re-exported processed product duty exemption model "not an option"

Published on
August 27, 2018

Companies that send U.S.-caught seafood to China for processing and then reimport it are facing 10 to 25 percent tariffs as the result of a trade war initiated by U.S. President Donald Trump.

The goods in the latest round of tariffs announced in July by the office of the U.S. Trade Representative, on its “USTR List 3,” include a wide range of seafood items. They are scheduled to be enacted in September.

Ian W. Moores, general counsel at Gloucester, Massachusetts, U.S.A.-based seafood firm F.W. Bryce, Inc., a subsidiary of Japanese conglomerate Nissui, said U.S. seafood firms should not rely on a duty-avoidance strategy on re-exported processed product – and could subject themselves to “substantial regulatory enforcement” if they do.

There has been expectation among many in the industry that imported items would be subject only to duty on the processing costs, instead of the full value of the articles so imported, Moores told SeafoodSource.

“It is quite uncertain, if not unlikely, that importing companies can send their own raw material to China for processing and then repatriate the finished goods into the U.S.A. duty-free,” he said.

Firms engaged in importing seafood from China should seek legal guidance from a U.S. practitioner focused in U.S. trade law and Customs Border Protection enforcement, Moores said. He points to precedence in cases like Koru North America v. United States [a New York court in 2016 found that a U.S. flashlight assembly operation didn’t constitute a substantial transformation and, therefore the flashlight was not of U.S. origin].

Moores answered a number of other questions regarding the potential costs faced by seafood importers as a result of the new tariffs and the potential legal consequences for violations of the new trade codes.

SeafoodSource: What are the risks faced by seafood importers in assuming that products sent to China for processing will not face duties on re-export back to the U.S.?

Moores: First, it appears quite clear that, although a commercial invoice may include in its presentation the cost of overseas processing, it is also mandated that the invoice state the ad valorem value of the item offered for import. Historically, of course, since the seafood items in question entered duty-free, there may have been little motivation for any tax collector to look closely at the value so declared. But in the event USTR List 3 is enacted, there will be considerable interest in all values declared and I suggest that any attempt to enter a USD 4.00 (EUR 3.43) per pound item based on a declaration that its import value is USD 0.18 (EUR 0.15) may not pass the “laugh test.” I suggested the USD 0.18 processing fee above facetiously. I am not close to the costing formulas for Chinese production. Depending on how exotic the finished product specification may be, processing could cost USD 0.40 to 0.80 (EUR 0.34 to 0.69) per pound, I would imagine. 

Second, it would appear that such importers may be looking to HTSUS [Harmonized Tariff Schedule of USA] subheading 9802.00.50, which provides for “Articles returned to the United States after having been exported to be advanced in value or improved in condition by any process of manufacture or other means.” It also applies to articles exported for repairs or alterations and assesses duty only on the value added [by the China processing]. In order to qualify for duty preference under this subheading, the exported articles must be advanced in value or improved in condition by repair or alteration and the foreign operation may not destroy the identity of the exported articles or create new or commercially different articles through a process of manufacture. 

SeafoodSource: When would seafood not meet this characterisation?

Moores: To the extent that this duty exemption may apply, it would only apply to raw material, product of U.S.A., shipped to China for processing. Undoubtedly, several U.S. companies have access to Alaskan raw material and in fact ship this to China for processing. But a substantial part of the China processed fish originate from Russian, Norwegian, Greenland, Icelandic, and similar harvesters. In these latter cases, this exemption will not apply in that the fish is not being “returned” to the U.S. after processing. 

More importantly, the business model whereby [headed and gutted] raw material is filleted and perhaps portioned, frozen, and packaged, goes far beyond “alteration.” Fortunately, this very fact pattern has been analyzed by the Tariff Classification Appeals Division, when FPI [a seafood company] was denied their effort to establish a tax-free classification on Alaska pollock, having been further processed at their plant in Canada. Specifically, the processing went well beyond mere alteration.

And finally, this business model does destroy the identity of the exported article and creates a commercially different article through a process of manufacture in China. A simple but compelling illustration of this can be made by simply placing an [headed and gutted] codfish alongside frozen cod fillets, loins, or portions. The concept of “substantial transformation,” which is commonly considered in matters of country of origin determination, applies just as well to the customs classification decision process when a determination is necessary whether or not a new or commercially different article has been created. 

SeafoodSource: When or how do you expect the theory of repatriation of processed products duty free to be proven or disproven?

Moores: It is actually more than a theory, in my opinion. It is pretty much “black-letter law” [well-established legal rules that are no longer subject to reasonable dispute]. If this has been anyone’s practice in the past, its implication would only have been manifest in the underpayment of Harbor Maintenance Fees and Merchandise Processing Fee. If the 10 or 25 percent duty is ultimately imposed, this practice would become manifest in the substantial underpayment of duty. CBP [Customs and Border Protection] will make demands on any entity importing on this understated value basis and thereby underpaying duty. 

SeafoodSource: What would such enforcement look like? 

Moores: If the importer fails to respond to the CBP demands, the Department of Justice would prosecute, including fines and penalties. Thus, a civil or criminal complaint [would be] filed by the United States, as represented by the U.S. attorney in whatever district the impacted statute grants jurisdiction. 

SeafoodSource: What has been happening in practice in this regard?

Moores: Since CBP entry data is confidential, even from FIOS inquiries I believe, only representatives of the U.S. government can properly answer this question. 

SeafoodSource: Do U.S. authorities have the machinery and resources in place to effectively monitor this?

Moores: Great question. One should hope so, in that it would be profoundly simple for a properly authorized U.S. government agent to access CBP entry data, including the declared value of all entries (Entry Summary Box 35). From there, common sense can determine if any entry is valued anywhere near the … reported market value, or substantially under-declared. If under-declared, further investigation would be warranted.

SeafoodSource: How has the trade war (and potential USTR list 3 enactment) affected F.W. Bryce in your processing operations and imports? Have you sought alternatives to China as a processing base?

Moores: F.W. Bryce is constantly seeking opportunities to provide enhanced value to its customers. This enhanced value can be defined in several ways: Use of enhanced sustainable resources, use of enhanced traceability of product through the supply chain, enhanced product attributes, etc. F.W. Bryce currently sources all of its species from several resources around the globe, to best mitigate against supply interruption. The potential imposition of an import tariff on Chinese seafood is certainly a destabilizing force in the seafood market, as China has, over time, been able to add substantial value to the supply chain as a result of China’s production skill and capacity. Any artificial inflation in the landed cost of seafood processed in China will inflict harm on U.S. seafood consumers, and all U.S. individuals and businesses which are committed to bringing this value to the consumers.

Photo courtesy of Ari Baldursson

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