As US-China trade war tariffs strike, ships at sea are safe but ‘blackmail’ mood sours at Chinese docks

Date: Friday, May 10, 2019
Source: South China Morning Post

  • Cargo already bound for the United States from China will not attract the new 25 per cent tariff, provided the importer can prove the goods were bought before Friday
  • US President Donald Trump followed through with his threat to increase the levy on US$200 million of Chinese goods

Cargo bound for the United States from China will not attract the higher 25 per cent tariff imposed on Friday by the United States government, provided the importer can prove the goods were purchased before May 10.

A directive from US Customs and Border Protection carved out an exclusion to the tariff increase for firms that bought goods before Friday, even if they arrive at American docks or airports after the tariff rise is triggered.

“For subject goods entered for consumption or withdrawn from warehouse for consumption on or after 12.01am eastern standard time on May 10, 2019, the 10 per cent duty will still apply,” read a customs guidance note.

The importer will need to prove that the goods were bought before the deadline, said Adrienne Braumiller, a partner at US law firm Braumiller Law group.

“It is important that the importer ensures it has proof of export such as the date of export on the bill of lading,” she said.

This sort of “grandfathering” clause is understood to be uncommon in tariff rulings and given the transit time – it can take from 14 to 21 days for ships to travel from China to the US – it may offer some respite for companies, who will hope negotiators reach a trade deal before their goods arrive, therefore meaning no extra tariff would be payable.

“The notice unlike the others has an on-water exception – so if the goods have been exported already they will not be subject to the duty. For entry into the US, the importer needs a bond underwritten by a surety company,” said John Brew, partner and co-chair of US law firm Crowell & Moring’s international trade group.

“Goods that were exported before [Friday] are grandfathered in to the previous 10 per cent rate,” Goldman Sachs analysts Alec Phillips and Blake Taylor added in a research note. “In practice, this means most of the tariff increase will not hit until two to three weeks from now, or roughly the amount of time it takes cargo to ship from China to the US.”

However, for those companies with goods waiting to ship, the situation is more complex. A Hunan-based state-owned exporter of canned fruit, who wished not to be named, said that she signed an export agreement with a US client in April, but that 20 container-loads have yet to be shipped, with a value of between US$400,000 and US$500,000.

“Luckily, we had confirmed with the client when signing the contract that if the tariff increased, they would be responsible for the additional tariffs for this order. Meanwhile, I already heard some other peers have already produced goods, but their US customers said that they would rather abandon the deposit if facing added tariffs,” she said, adding that the buyer had paid a deposit, but not the full invoice.

The exporter felt that this was a ploy being used by US importers to haggle over price, “because the goods have been produced and it is impossible for Chinese factories to cancel the order”.

“US clients will threaten to cancel the order with the Chinese side in order to blackmail them. Most of them will be only be responsible for 5 per cent on the US side, and the Chinese side have to pay the other 10 per cent,” she added. “We have already absorbed the 10 per cent tariff to keep our US market share. Now there is no room for another 15 per cent.”

The tariffs, she said, had almost “cut the throat” of China’s canned fruit exports to the US.

“I heard that another big canned fruit producer in Hunan had already suspended production last year, firing many workers and leasing out their factory plant,” she added.

Wu Suojun, general manager of Shanghai Ener Warehouse near Waigaoqiao port, said the news of a 25 per cent tariff increase came so suddenly that it did not give exporters much time to prepare and so “there was a lot of front-loading last year, but not much now”.

“After the tariff rise, I believe goods loaded for the US market will decline further for sure. That means I need to make more efforts to find new clients, and my competitors in storage and transport will feel the same way because we are all services for trade. Competition will get fierce and even ugly,” Wu said.

Logistics workers at various Shanghai docks had not noticed a spike in business this week, despite expectations that companies would get their purchase orders in early to avoid tariffs announced by US President Donald Trump via tweet on Sunday.

Zha Zhonglei, a worker for Shanghai Tongchang, a logistics company at Waigaoqiao port, explained that goods for export usually stay in their warehouses to be loaded into containers before shipment, but that the new tariffs could lead to an exodus of business out of Shanghai’s ports.

“I don’t know how much impact [the tariffs] will have on us because we are focused on export orders to Southeast Asian countries. But it will eventually. I have seen clients move their production to Vietnam and export to the US from there,” said Zha, who has worked in the logistics business for over two decades.

According to Jennifer Diaz, a trade lawyer at Diaz Trade Law in Florida, importers must file shipment documents at the US port of entry, at a location specified by a port director, within 15 days of the shipment arriving, if they are to avoid paying the higher duty.

“These could include an invoice, packing lists, or other trade documents such as bills of lading,” she said.

However, these documents are notoriously open to manipulation – the largely paper-based world of trade and shipping is rife with document forgery and fraud.

Jolyon Ellwood-Russell, a trade finance partner at Simmons & Simmons in Hong Kong, said that “the increase in tariffs and the new dateline imposition may incentivise some fraudulent avoidance tactics and we may see a spike in such behaviour, such as the backdating of invoices”.

This would involve changing the date on an invoice to make it look like the goods were purchased before the tariff increase.

“It would have to be done in collaboration between the importer and exporter, because neither wants to have their margin eroded. But there are so many data points in a trade deal, just because you change the date on the invoice, doesn't mean the customs won't find you out. The bank who is paying the letter of credit, for example, could notice discrepancies, and US Customs and Border Protection will also be on the lookout for this sort of behaviour,” Ellwood-Russell added.

 

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