On Thursday 12 December, we hosted the webinar “Trump and Tariffs: A Global Perspective of What Lies Ahead”. The session focused on the potential tariff impacts of President-Elect Trump’s second term in office, giving a global perspective on what to look out for, and how best to prepare.
Speakers from across the globe discussed the potential impacts in their respective jurisdictions, the key takeaways of which can be found here.
Highlights from our Asia Pacific speaker Frank Pan (Shanghai) are set out below, and can be heard here. To listen to the full webinar, please click here.
Highlights from Asia Pacific
China’s potential response to new Trump tariffs
- China has been and will continue to be the primary target of Trump tariffs.
- Unilateral tariff tools: Tools developed during the first administration are now being considered for upgrades to retaliatory measures. The enforcement of retaliatory tariffs between 5% and 25% on U.S. products was effectively suspended in March 2020 following the “Phase One” ceasefire agreement between China and the U.S. To implement this commitment, a tariff waiving mechanism was introduced, allowing companies to seek a waiver of Chinese retaliatory measures on a shipment-by-shipment basis.
- For the second Trump administration, a first obvious step is likely to be the removal of this waiver mechanism and the reactivation or even increase of retaliatory tariffs.
- Other unilateral measures could be investigation of “unfair trade practices,” based on the new Foreign Trade Law and Tariff Law, similar to the procedures under Section 301 in the U.S., which include anti-trade barrier and anti-discrimination investigations.
- Non-tariff tools: Economic measures are also being used to control the global supply chains of critical minerals or other materials, for which China is a major supplier. Methods include export controls and reforms to export VAT refund rates for certain products, such as batteries, oils, and solar panels.
- Another non-tariff tool is through legislation: a recent draft regulation mandates local rules to favour local production by allowing local products to be listed at 20% lower than the price compared to foreign products in public procurement contracts. This aims to encourage multinational companies to localize their sourcing and production to participate in public procurement in China and mitigate the disruption of the supply chain.
Potential trends in enforcement from a Chinese perspective
- Country of origin: The new punitive tariff rules under the new Tariff Law could be enforced against products imported from the U.S. with non-U.S. origin or products exported to China from a non-U.S. country but supplied by a U.S.-headquartered multinational company. For companies involved in those supply chain models, it is now critical to report the country of origin and make available substantiated documents. The current four-digit classification rule offers little flexibility, and is hard to satisfy as there is no de minimis exception. Companies can seek certainty by getting an advanced ruling by customs. Advanced rulings can also be obtained for valuation queries.
- Transfer pricing adjustments: During the first Trump administration, there were audit cases where companies made downward transfer pricing adjustments as Customs suspected that these were part of tariff evasion schemes. Therefore, companies should be cautious in planning their transfer pricing adjustments, if they coincide with the introduction of new retaliatory tariffs.
- Inter-company pricing: This mechanism is implemented by provinces. The central government encourages local tax and customs authorities to align on documentation that they can rely on to decide on a company’s tax liabilities and any adjustments to be made.
- Circumvention: The concept of circumvention has been introduced under the new Tariff Law. There is little clarity on the regime’s enforcement. Technically viable tariff mechanism tools, such as tariff engineering, may be seen as lacking business justification and may constitute circumvention under the new law.
- Relocations: In the Asia-Pacific region, there is a trend of companies relocating their manufacturing to other parts of Asia to mitigate the impact of U.S. tariffs. Many customs considerations come into play, such as the business friendliness of customs authorities and existing free trade agreements. Companies should consider whether the relocation may operate a “substantial transformation” of the product and how it will influence the country of origin. It is important to take into account both the local rules of origin and those from the U.S. Coordination among ASEAN countries (e.g., Thailand) and Western enforcement agencies may increase companies’ exposure to customs liability if they relocate to those countries without satisfying the “substantial transformation” standards.
Mitigation measures Key takeaways for businesses include implementing due diligence on global supply chains, with a particular emphasis on targeted jurisdictions such as China and the US’s USMCA counterparts. Whilst Trump’s second term will be unpredictable, key mitigation strategies can be implemented, such as relocation of production (subject to anti-circumvention rules – see our blog post on the recent ECJ case on anti-circumvention of tariffs), considering contractual clauses and exclusions, as well as possible lobbying.
