On March 8, 2018 President Trump announced global tariffs of 25% on steel imports and 10% on aluminum imports. The tariff was imposed under Section 232 of the Trade Expansion Act of 1962, which grants the President discretion in imposing tariffs on particular items that could impact national security.
This article will focus on these new tariffs, how they operate, when they first apply, if there are any exceptions, and more. It also addresses what a business might do to deal with these tariffs. This is a complicated and technical topic, and not everything will be addressed, but this should provide an overview of some of the issues and implications of these tariffs. Also, keep in mind that many of the details for implementing these tariffs are fluid – there is much information being released on a regular basis, so businesses need to continually monitor these developments.
Background on Tariffs
A tariff is essentially a tax imposed on imported goods. Over the years, Congress has granted the President additional authority to impose tariffs in certain circumstances. Tariffs can be imposed in situations of national security (as was just done on imported steel and aluminum); during a time of war; if a national emergency is declared; or to confront discriminatory trade practices.
A tariff is assessed based on a percentage of the value of the property imported. The Harmonized Tariff Schedule of the United States of America (“HTSUS” or “HTSA”), is a system used to classify goods imported into the country. It is based on the International Harmonized Commodity Description and Coding System (HS) and classifies goods via their name, use, and material used for construction. It is a very detailed coding system and important to understand the classification of each product as some carry with them one tariff, while another similar product may carry a different tariff, and yet another also similar product may have no tariff at all. See the tariff schedule here.
Why the Tariffs on Steel and Aluminum?
While the authority to impose tariffs has resided with the President for years, it has not been used very often. Presidents have been concerned that other countries may retaliate and impose their own tariffs, which could perhaps lead to a trade war.
In April 2017, the Department of Commerce commenced a Section 232 investigation which eventually concluded that both steel and aluminum imports were harming a domestic industry and impacting national security. In the past, investigations did not always result in higher tariffs, but became part of the deliberations with other countries. In February 2018, Commerce Secretary Wilbur Ross completed his investigation and offered several options. On March 1, 2018, President Trump announced global tariffs of 25% on steel and 10% on aluminum imports, and signed a proclamation for these tariffs on March 8, 2018. These tariffs took effect on March 23, 2018. The goal of the tariffs is to increase the operating rate of domestic steel and aluminum production.
What is the Impact of these New Tariffs?
The 25% tariff on steel and 10% tariff on aluminum apply to imported goods and are in addition to any other current fees or duties. The tariffs apply to imports from all countries, except for Mexico, Canada, Argentina, Brazil, Australia, EU, and South Korea. These countries are exempted, however, for only a short time period until May 1, 2018.
Proclamation 9704 (click here for the full text of this proclamation) issued by President Trump on March 8, 2018 deals with aluminum and provides the following:
For the purposes of this proclamation, ‘‘aluminum articles’’ are defined in the Harmonized Tariff Schedule (HTS) as: (a) unwrought aluminum (HTS 7601); (b) aluminum bars, rods, and profiles (HTS 7604); (c) aluminum wire (HTS 7605); (d) aluminum plate, sheet, strip, and foil (flat rolled products) (HTS 7606 and 7607); (e) aluminum tubes and pipes and tube and pipe fitting (HTS 7608 and 7609); and (f) aluminum castings and forgings (HTS 76126.96.36.199 and 76188.8.131.52), including any subsequent revisions to these HTS classifications.
Proclamation 9705 (click here for the full text of this proclamation) issued by President Trump on March 8, 2018 deals with steel and provides the following:
For the purposes of this proclamation, ‘‘steel articles’’ are defined at the Harmonized Tariff Schedule (HTS) 6-digit level as: 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90, including any subsequent revisions to these HTS classifications.
As noted above, these categories under the HTS for aluminum and steel above are very specific as to what types or aluminum or steel products (or articles) the new tariff applies to, or does not apply to. Interested companies or parties should carefully review the HTS for these products.
When Do the Tariffs Take Effect?
As noted above, the new tariffs take effect on March 23, 2018. The exemption from these tariffs for several countries only lasts until May 1, 2018. Companies and other interested parties should continue to monitor developments from the Administration as several revisions and amendments have already occurred to the above Proclamations, and other changes are possible.
Are there any Exceptions?
Businesses or individuals using steel or aluminum in the U.S. may make formal requests to be excluded (an “exclusion request”) from the tariff. There is a specific format and process for making these requests, and these must be submitted electronically. In addition, a separate request must be submitted for each product using the above HTS classification codes. It is important to follow these submission rules carefully and provide all requested information. Requests for exclusion will be reviewed and relief will be granted only in the following circumstances. (Please click here for the rules to submit exclusion requests):
- The aluminum or steel product (or article), not produced in the U.S. is of satisfactory quality;
- The aluminum or steel product (or article) is not produced in the U.S. in sufficient or reasonably available amount; or
- There is a national security consideration.
Also, please note that other parties can object to an organization’s exclusion request.
If an exclusion is granted, it is particular and specific to the party requesting the exclusion and only for the particular product.
In addition, other countries may request an exemption from these tariffs if there is a security relationship with the U.S. Any exemption granted to such country would be announced by the Department of Commerce.
What Steps can a Business Take in Response to these Tariffs?
These tariffs could have broad implications in many industries. For instance, the transportation (automobile and airplane), construction, heavy manufacturing, and energy industries could all be impacted. If your company is currently importing products that are subject to these new tariffs, you need to analyze whether the product is actually subject to the new tariff (again, review the HTS codes carefully). You must also find out whether the product can be acquired from another country that is not subject to the tariff, or search for another product that might serve as a substitute for the impacted product. Perhaps there could be a U.S. supplier who offers the same product? You then might need to model out the cost impact of these costs changes in your business. Further, could your situation be such that you could build a case to submit an exclusion request for certain products? These are just some of the questions you need to address now as you seek to keep your costs down and avoid or reduce the impact of these new tariffs.
Another consideration for a manufacturer or distributor that realizes it will be subject to these new tariffs in some manner: If the manufacturer or distributor feels it will not be able to avoid these new tariffs, but will be subject to higher costs, the company might want to explore the “LIFO” (“Last-in, First-out”) inventory method. The LIFO method has been around for many years and is an excellent tool to use when a business faces rising product costs and inflation. LIFO provides a significant tax opportunity by expensing these higher costs in the current year, rather then putting these costs on the balance sheet. In addition, the IRS (through the Department of Labor) publishes inflation factors on a monthly basis and these inflation factors can be used to measure the inflation in accompanying products, which may exceed the company’s actual inflation. Please note that if a company adopts LIFO for tax purposes, it must also use it for book purposes. We have worked with the LIFO method with many businesses in various industries and we can assist you in these efforts. LIFO affords businesses a significant and unique opportunity and can be adopted in 2018 – and in some cases a business may even be able to adopt LIFO for 2017 if it has not filed its 2017 tax return yet and realize tax savings at the higher tax rates in 2017.
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There are many issues to address for companies impacted by these new tariffs. Please contact your Sikich advisor if you have any questions.