The
Dangers of the Big Switch

Transshipping:
Get caught in the crime ...
and you could be doing time.

By Emerson Schwartzkopf


In a new era of importing hard surfaces, some of the best advice is the oldest: caveat emptor.


A series of U.S. tariffs on Chinese materials and proposed duties for other countries mean a sharp increase in wholesale (and, eventually, retail) prices. To evade the import penalties, there’s been a less-than-underground effort to mask material origins.


The concept – transshipping – sounds appealing. It’s also illegal, and could result in heavy penalties for those involved … in money and in time served.


“Given the atmosphere that we're in, I think it’s a situation where companies doing good business should be conservative and cautious,” said Jonathan Stoel, partner in the Washington-based Hogan Lovells law firm that’s represented U.S. importers in recent hard-surface tariff cases.


During the countertop-fabrication boom of the 2000s, tariffs on imported dimensional surfaces didn’t create much of a divot in profit margins. Natural-stone duties on cut or otherwise processed materials ranged from 2.8% to 6.5%, and quartz surfaces came into the country duty-free. (Then-onerous tariffs of 50%-60% applied only to imports from either Cuba or North Korea.)

The situation changed dramatically in 2018 with Cambria Company LLC’s unfair-trade petition to the U.S. International Trade Commission (USITC) on quartz surfaces from China. A USITC decision late this spring set separate tariffs on Chinese quartz surfaces for anti-dumping (selling below market value) and countervailing (subsidized production) that, combined, often reach 300% or more of the material’s declared customs value. Those tariffs follow Chinese quartz surfaces, even if slabs are worked or used as part of an product assembled in a different country.


All Chinese hard surfaces took another hit with the Section 301 general tariffs set by the Trump administration in the U.S.-China trade war, adding 25% (as of November) duties. (And, for Chinese quartz surfaces, that’s on top of the unfair-trade tariffs).


The tariff issue, however, goes beyond trade with China. More unfair trade petitions by Cambria this year led to preliminary countervailing tariffs of on quartz surfaces from India and Turkey, with an announcement on initial anti-dumping tariffs set for early December.


And, a decades-old fight over European government subsidies to build Airbus airliners resulted in European Union non-calcareous natural stone and quartz surfaces being put on a tentative punitive U.S. tariff list. (The hard surfaces didn’t appear on the first Airbus tariff, though.)

“Those who are doing things the right way are, frankly, getting pretty frustrated when others are breaking the rules."

Jonathan Stoel
Partner, Hogan Lovells
Washington

With all the new developments in tariffs, it’s tough to keep track of everything. Citing confusion or ignorance, Stoel said, is no defense.


“It’s pretty important to remember that the duty of reasonable care as an importer is on you,” he said. “The duty of reasonable care doesn't start when Customs comes and asks you for something. It starts the moment that you start, when you sign the paperwork.”


Pleading that there’s been an honest mistake would still involve paying the duties, Stoel explained, along with interest “which obviously could be very substantial.”


Shortly after the USITC decision, however, emails to U.S. hard-surface importers, distributors and fabricators offered a fix to high Chinese quartz tariffs: transshipping. By some acts of sleigh in repackaging and rebranding, quartz slabs and other materials from China would get a new country of origin … and be free of the massive duties.


Here’s a real-time example pulled out of the spam email inbox:


As you know,USA add very high antidumping tax for the Kitchen Cabinet/Stone which imported from China.

That is a heavy hit for the USA importers like you.

We are the Professional trading solution provider for avoiding the anti-dumping tax.We can solve the problem for you!

Here,For our service,the rounting is as below:

CHINA--->MALAYSIA (change the container in Malaysia warehouse)--->USA.

Due to USA only add anti-dumping tax for Chinese Kitchen Cabinet/Stone, We will provide the Malaysia factory's documents as below for you do the customs clearance in Malaysia then can solve the problem:

1.We have Kitchen Cabinet/Stone factory in Malaysia

2.Shipping Line Bill Of lading under Malaysia factory's title

3.Malaysia factory's Packing List and Invoice

4.Malaysia K2 (customs clearance sheet)


Does it work well enough to fool U.S. Customs and Border Protection (CBP) inspectors at ports-of-entry? Don’t count on it.


“At CBP, in addition to their ongoing monitoring and surveillance,” Stoel says, “anytime there is a countervailing duty case or anti-dumping duty case, they automatically sort of put those products in a heightened class for investigations and sampling.”


Customs inspectors aren’t the only eyes keeping track, either. The federal Enforce and Protect Act (EAPA), starting in 2016, eased the process for anyone to claim transshipping actions by companies to elude U.S. tariffs. (For the record, the claims are called E-allegations.)

“Those who are doing things the right way are, frankly, getting pretty frustrated when others are breaking the rules. If they think there are reasonable grounds for investigation, they may help the government try to investigate those things.”


Intentional evasion of tariffs – in plain talk, breaking federal law – is something the U.S. government takes very seriously. One of the most-extreme involved intentional mislabeling of honey from China with origins from other countries.


“There were people who went to jail in the United States as a result of that,” Stoel said. “People had been involved in a conspiracy to defraud the United States.”


Most likely the penalties will be monetary – and stuff.


“The value of the product is not in question, because that was probably right,” Stoel said. "It’s a question of whether you were showing the right country of origin. Often times, the penalty is a multiple of the value of the imported goods.


“It could be up to the domestic sale value of the goods. If you imported $1 million, it could go up to $1 million in penalties, which is obviously pretty significant.”


The threat of transshipping also puts legitimate shipments into question from China’s neighboring countries (such as Vietnam) or locations with new factories (such as Malaysia or the Philippines).


“People get tripped up when an exporter says, ‘Well, you know, the product was manufactured here,’ but often times that’s not enough,” Stoel says.


The solution, he adds, is to get a certificate of origin from the actual producer … or, better yet, from the country itself.


“In some countries – like Vietnam – you can get a certificate of origin from the government itself,” Stoel said. “It makes it even more bona fide and gives it a heightened sense of credibility.


“As a good company, you don’t want to take any chances in this area. And, frankly, nobody wants to chew up all their profits on lawyers and accountants. You’re much better off doing it right on the front end.”


Note: Hogan Lovells represents a number of U.S.-based companies, including MSI, Arizona Tile and Bedrosians Tile & Stone, in tariff cases before the USITC and the U.S. Department of Commerce.