Reciprocal tariffs: Customs scrutiny to get more strict everywhere

After causing a week of chaos across the world, the United States has held in temporary abeyance for 90 days the reciprocal tariffs imposed on imports from most countries. The reciprocal tariffs on goods from China have been raised to 145 per cent, whereas the 10 per cent additional tariff on goods from all other countries that came into effect on April 5 will continue. China has retaliated with 125 per cent tariffs on goods from the US. 

In the coming weeks, many countries, including India, will negotiate with the US for lower tariffs. The dilemma for them is how to give in to the US demands, fully or partially, without appearing to surrender under pressure, a predicament confirmed by our government’s denial of ‘talks under a gun’. So, the situation can keep changing every day, with possibilities of even China and the US talking with each other. Meanwhile, China is reaching out to many countries for better trade relations. 

Now, very little trade is possible between China and the US at the present tariff levels. Inevitably, they will look for other markets where they can sell more, even at discounted prices. That is a worry for other countries whose domestic producers will naturally cry for protection and in response more tariff and non-tariff barriers to stem the flood of imports will be erected. That is bound to curb global trade and economic growth. Customs scrutiny everywhere will get more stringent before allowing imported goods to enter the domestic economy, leading to more anxieties for importers and exporters. Our government has already set up a ‘global trade and tariff help desk’ and asked the Customs to watch out for any surge in imports and re-export of imported goods in substantially the same form. 

The exporters using any inputs from China should now be wary of the US Customs. The goods entering the US may be subjected to rigorous inspection to verify whether they are essentially Chinese goods entering under a different garb after minimal value addition in the exporting country. The US Customs employ the ‘substantial transformation’ criterion for goods that consist in whole or in part of materials from more than one country on a case-to-case basis, which is based on a change in name/character/use method. Textile and textile articles are subject to the ‘substantial transformation’ criterion by the ‘tariff-shift’ method, which requires a change in the harmonised system (HS) classification code of the non-originating inputs to the HS code of the final product. China may also subject the imported goods to similar examination and origin criteria.  

One option available to exporters using inputs from China, to reduce the risk of delay in clearance of their goods at the US Customs, is to ask the buyers to seek binding advance rulings from the US Customs, a transparent and efficient mechanism to understand how they will treat a prospective import transaction.  

The US Customs have already started asking for details and value of foreign origin inputs used in making the goods being imported. I wouldn’t be surprised if the Trump administration makes it a mandatory requirement and also subjects such inputs from China to import duty at the same rate as the Chinese goods entering the US. China may also do so in respect of goods made from inputs from the US.  

Email : tncrajagopalan@gmail.com