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Ahead of the Curve Auto Supplier Blog

July 18, 2019

Unpredictable Tariffs

INTRODUCTION

Since mid-2018, new and unpredictable tariffs have become an inescapable part of the automotive supply chain. Tariffs applicable to automotive products started with tariffs on steel and aluminum imports. Within months, tariffs were imposed on Chinese imports. The Chinese tariffs have come in waves that have increased to the point of soon, possibly including almost all imports from China. Since the initial announcements, the tariffs have been delayed at times, countries have been exempted, negotiations have been held, and particular exclusion applications have been denied and granted. What may happen next as negotiations continue with China and we await a delayed potential imposition of automotive tariffs, no one knows. But which side, buyer or seller, is liable to pay the tariffs is knowable and predictable. 
 
TYPES OF UNPREDICTABLE TARIFFS

Section 232 Tariffs

Tariffs on steel (25%) and aluminum (10%) have been imposed under Section 232 of the Trade Expansion Act of 1962, commonly referred to as “Section 232 tariffs.” Since imposition, several countries have negotiated exemptions, including Canada, Australia, and Mexico. Other countries are exempt, but subject to quotas on imports. For steel, Argentina, Brazil, and South Korea are exempt from tariffs, but subject to quotas. For aluminum, Argentina is exempt but subject to a quota. Countries subject to quotas, which are determined on a quarterly basis, cannot import steel or aluminum once the quota levels have been reached. Importers may seek exemptions from the quotas, which, if granted, would allow for import beyond the quota subject to the applicable tariff. 

After the tariffs were imposed, an exemption application process was put in place for importers to request exemption from the tariffs on a product-by-product basis. Since its inception, over 70,000 exemption applications have been filed for steel tariffs, with 16,000 granted and 46,000 denied, and the remainder still in process. For aluminum tariffs, over 10,000 applications have been filed, with 3,000 granted, 500 denied, and the remainder still in process. 

In addition to the steel and aluminum tariffs, the Administration has also made announcements about tariffs that may be imposed on automotive products. There is no clarity as to whether these tariffs will apply to automobiles, automotive parts, after-market automotive parts, automotive related products from a particular country or region, or all of the above. The rate of the tariffs also is not clear, but there have been mentions of an additional 25% tariff being imposed on such products. As of May 2019, the final decision on these tariffs has been put off for six months. 

Section 301 Tariffs

Under Section 301 of the Trade Act of 1974, commonly referred to as “Section 301,” the Administration, beginning in mid-2018, began imposing tariffs on imports of Chinese products. The tariffs initially started with 25% tariffs on about $34 Billion worth of Chinese imports. An additional $16 Billion of imports was added soon after, and then another $200 Billion tranche of goods followed. The $200 Billion worth of products was initially subject to a 10% tariff, which increased to 25% in May 2019. Another 25% tariff is ready to be imposed on virtually all remaining Chinese imports, but has, for now, been delayed after discussions at the recent G20 Summit. 

After imposition of these tariffs, processes were put in place for importers and other interested parties to seek exemptions. The deadlines for the first two lists of products have passed. The third list of $200 Billion worth of products is still open for exemption applications until September 30, 2019. Exemptions have been granted for several product lines, lists of which can be found on the Office of the United States Trade Representative’s website. 

Mexico Tariffs

The volatility of potential tariffs was recently exemplified by the Administration’s announcement in May 2019, of tariffs that would be imposed on all imports from Mexico under the International Emergency Economic Powers Act of 1977. The tariffs were to begin with a 5% tariff effective June 10, 2019, which would increase by 5% each month up to 25%. Within a few weeks, the tariffs were cancelled, with a statement that they may be imposed if the Administration is not satisfied with Mexico’s efforts to curtail migrants crossing its borders. 
 
PREDICTABILITY THROUGH CONTRACTS

The Section 232, Section 301, and the Mexico tariffs have made one point clear: nothing is clear.  Throughout the tariffs process, the percentage of tariffs, when the tariffs would be imposed, what products would be subject to the tariffs, or what countries would be subject to the tariffs has always been in the air until imposition of the tariffs, and sometimes even after. Whether the tariffs on Mexican imports will be imposed again, whether and when the final tranche of Chinese tariffs will apply, and what may be included in the automotive tariffs, remains unknown. Such unknowns can be problematic for businesses in the automotive supply chain engaged in quoting products and calculating future costs and expenses. These businesses can provide for predictability by controlling their contracts.

In this new tariff world, it is important to negotiate and review some key terms in your contracts that address liability for payment of such tariffs. Start with the delivery term. Where is your product being delivered to or delivered from? What is the delivery term and how does it address liability for tariffs? What components are included in the price? Is the price for your products subject to raw materials indices? Do those indices include tariffs in calculating price? If you are contractually liable for these tariffs, is there a way out? Is the contract duration or quantity an opening to renegotiate? Can you claim force majeure? 

All of these questions require a contract-by-contract and product-by-product analysis. By understanding tariffs under your current contracts, and negotiating your future contractual terms to specifically address tariffs, you can provide the predictability in your own business that may be lacking in our new world of tariffs.

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