China Trade: Know Before You Go

Saturday, December 1, 2007 - 00:00

Trade between the United States and China continues to be front page news, and the source of a great deal of uncertainty in the trade community. It is not uncommon to read newspapers articles about the trade imbalance between the two countries, the continued threat by Congress to impose duty increases on Chinese products to offset unfair currency conversion rates, and the dangers posed by toys and food products that are being exported from China. China is also in the hot seat because of its ever-expanding economy which gobbles up the Earth's resources, and its lack of attention to the environment.

If we put all of this hype, and these threats aside, the fact remains that trade with China will continue to grow on all fronts. The prices for products coming from China can not be beat in other fully developed countries, so imports from China are likely to continue to increase until developing countries can challenge China as to product quality and timeliness of deliveries. In addition, more and more companies from industrialized countries are establishing themselves in China to meet their manufacturing needs to produce goods to sell all over the world, and to tap into the Chinese consumer market which is expected to grow as the country's standard of living continues to rise. We have received an increasing number of inquiries regarding importing goods into China.

Buyer Beware

On the sourcing side, importers of goods from China and other offshore countries have to go the extra mile to make sure that they don't fall into the culture gap. As should be painfully evident from recent news coverage, some producers in China may be willing to take risks because they have a pretty good chance that the problem will not be detected or their industry is not highly regulated. On the other hand, the work ethic is excellent, and they have developed a number of sophisticated manufacturing operations which makes China the place to have goods made. As a result, prudent companies must exercise additional due diligence to make sure that they won't have to pay a price down the road for buying goods where the prices were almost too good to believe.

As subcontracting is very common in manufacturing operations, importers must ascertain the identity of their producers and any subcontractors that are used. While it may be impossible to physically sit there as goods are being made, initial visits to all of the facilities, and factory profiles should be obtained. It is also necessary to maintain relationships with people on the ground who can continue this due diligence if a permanent base is not established in the manufacturing country. It is important to know that the factories meet U.S. standards and limitations concerning use of prison labor, child labor, and a safe work environment. This type of analysis is critical to avoid having goods seized and to avoiding the bad publicity that comes from violations of these rules.

The factories should also have documentation to be able to answer questions as to when certain products were made, and what components or materials were used in the products. Laboratory testing of products may also be required to make sure that the product and its components meet the myriad of product standards imposed by federal and state agencies. We all know that shipments of food and toys from China will likely be subject to a greater number of inspections because of recent problems. In addition, based on a number of bills currently pending in Congress, it is likely that penalties for importing violative goods are going to be increased. Against this background, there is no point in taking the ostrich approach to these issues. What you don't know can hurt you. Be proactive. Make sure that the products comply, and that compliance can be documented. It may be more expensive to implement a compliance program in the beginning, but it can save money in the long run.

Importing The Goods Into The U.S.

Some companies decide to step back from the import process and to buy goods on a landed duty paid basis. This may provide some insulation from Customs penalties, but it does not protect against the possibilities of trade disruption, disappointing customers if goods don't arrive or are recalled, or having the goods seized for violating the law. Companies who purchase on a "landed basis" should continue to exercise due diligence to know the name and location of the producer, to be sure that the product will pass muster, and that it has been properly cleared by U.S. Customs.

Every so often U.S. Customs identifies and closes down fraudulent import programs, many of which have involved Chinese goods. For example, in the recent past, we have seen situations where (1) the goods were claimed to be furniture but were really apparel; (2) the goods were placed in bond and claimed to be exported - when in reality they were smuggled into the country; and (3) my favorite - the location provided for the factory was visited and was found to be a parking lot. Quite often the U.S. importer or consignee did not know about these schemes, but they suffered a penalty or business disruption nevertheless. Unfortunately, these discoveries have usually been made after the goods have been paid for so the consignee pays the price for the vendor's fraud.

Antidumping And Countervailing Duties

This continues to be an area of tremendous uncertainty for importers. When domestic producers move their production facilities to China, there are so many issues to deal with: recreating their factory overseas; quality control; local tax assessments; creating transportation arrangements for goods; and identifying the duty rates to the charged in the U.S. and overseas.

The U.S. duty rates on hard goods have been reduced substantially so most products are assessed with duty of 5 percent or less. The U.S. duty rates on footwear and apparel can be significantly higher, but savvy importers can reduce those duties by restructuring products or transactions. It is perfectly acceptable to structure goods and products to reduce duties as long as proper disclosures to Customs have been made. In any event, regular duties can be determined in advance and built into the price of the goods. You can even get a binding ruling from Customs to confirm the duty rate.

Just when all of those areas have been mastered, and you think your prices are set, you discover that one of the U.S. producers of your type of goods files a complaint alleging that antidumping duties and counterveiling duties should be imposed on imports from China. The large majority of such cases initiated today involve goods from China. Because China is considered to be a non-market economy country, the process for these cases often relies in part on data from other "comparable" surrogate countries ( i.e ., India).

ADD and CVD duty cases are a nightmare. A petition is filed, alleging that huge assessments should be made - and if those additional "margins" are assessed, it will make the product unmarketable in the U.S. The acceptance of the complaint and the commencement of a case immediately creates tremendous uncertainty in the industry. Then the real torture begins. There are countless proceedings, determinations, reviews, and court proceedings that drag this process out for many years. Sometimes the initial decision creates deposit rates that cause heart failure, but don't check into the ICU so fast, because the final decision can result in no assessments, or substantial refunds of duty deposits.

The problem is that many U.S. producers or importers do not understand the process, and they do not prepare for the war. They might immediately consider bankruptcy or abandoning sources prematurely, when an educated and measured response might permit them to continue their businesses without much disruption. With our office in Hong Kong and our affiliates in China we have been involved in every phase of these proceedings and reviews. Once again we recommend taking a due diligence proactive approach in these matters. Pre-case filing surveys can review data to identify and quantify potential exposure. Sometimes prices in different markets can be changed, manufacturing operations can be shifted to another country or split between two countries, and surrogate cost data can be developed - all with an eye toward understanding and minimizing risk on such matters.

China is no longer the new frontier that it once was, but has its own way of doing business that is sometimes inconsistent with U.S. requirements. It takes a little extra work to make sure that your business dealings in China come to the same happy ending as when your products were sourced right here in the U.S.

Robert B. Silverman is a Partner in the firm Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP.

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