Leibowitz on Trade: DOC Bucket Runneth Over on Exclusions

• FTZ Issues: Many American manufacturers operate in foreign trade zones (FTZs). A key benefit of zones permits companies that have asked for “production authority” to choose tariff rates for production inputs based on the most favorable rate for the companies. Tariff anomalies known as “inverted tariffs” tax some inputs at a higher rate than finished goods. Foreign factories automatically use the lower finished product duty rate for their production, while U.S. companies must pay the higher rate on the components. In a perfect world, tariff relationships would be “right side up,” meaning that the production inputs are dutiable at the same or lower rate than finished goods. However, we do not live in a perfect world. The new tariffs have created huge new “inverted tariffs” that will move manufacturing offshore. The proclamations have required FTZ users to “elect” a “privileged foreign” status, which takes away their freedom to pay the lower duties applicable to finished goods. There were several presentations about this and other issues that affect manufacturing competitiveness for U.S. companies. If you have questions about this, please advise.

• Product Exclusion Requests—Product exclusion requests continue to increase. As of Tuesday, 9,934 comments have been submitted, and 5,254 have been posted. Not all of these are product exclusion requests, but it appears they are the vast majority of the filings. General comments on the exclusion process form the rest. As of May 22, 140 requests have gone through the 30-day comment period. Many of these requests received no opposition. Still, no exclusion requests have been approved (or rejected for that matter).

• Country Exemptions—On Tuesday, the EU Trade Commissioner, Cecilia Malmstrom, declared that she expects the United States to reject the latest EU proposal to avoid tariffs as of June 1. The EU reportedly offered to negotiate several trade issues in exchange for an exemption from the steel and aluminum tariffs. The EU offered to put on the table industrial tariffs, including autos, LNG imports, regulatory cooperation and reform of the WTO Appellate Body, which has been paralyzed for months by a dispute between the United States and other countries. The EU has not accepted the idea of import quotas or voluntary export restraints as violations of WTO rules. Tariffs loom for the EU, apparently.

Brazil steel interests pushed back today on the nascent quota agreement as too restrictive and not as good as tariffs. Steel exporters point out that an “absolute quota” agreement, such as the one South Korea accepted, means that when quotas fill, more imports are not allowed. A tariff rate quota, by contrast, would involve low-duty imports up to a certain level and then impose tariffs. Supply chains much prefer a TRQ, as I have previously explained, because imports can continue. Brazil is also challenging the application of tariffs or quotas to semifinished steel, such as slabs. Only steel producers in the United States use semifinished steel. Brazil is the leading exporter of semifinished steel to the United States, and many steel companies rely on these imports because there is not an active market in the United States for domestically produced semifinished steel. So far, the U.S. side has not been heard from. There is barely a week to go before June 1.

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