GateHouse Media analysis suggests companies might be miscoding to avoid tariffs.
When President Donald Trump made good last summer on his promise to slap steep tariffs on a host of Chinese imports, some Chinese companies struggled to remain profitable.
Others got creative.
A GateHouse Media data analysis of Chinese imports to the United States shows an uptick in the potential misclassification of product codes to avoid the higher tariffs. In particular, the analysis reveals nearly a dozen Chinese imports — including woven fabrics, furniture mounts and lamps — where such misclassification could be likely.
The findings correspond with information provided during interviews with at least 20 traders, brokers, economics researchers and former and current government officials that offer a rare peek into how easy it is for some companies to avoid Trump’s new duties.
“It’s not a government-sponsored effort by the Chinese authorities to get around Trump’s tariffs,” said Gary Hufbauer, a senior fellow at Peterson Institute for International Economics, or PIIE.
“It’s done by individual suppliers and individual firms because, for the tariff at this level, that’s more than any profit margin that any normal firm makes on a shipment,” Hufbauer said. “They can try to absorb some of that but it’s painful. So naturally, they will seek some alternatives.”
According to Hufbauer, as well as GateHouse’s analysis, the possibility of misclassification is probably increasing amid the escalating trade war.
To date, the United States has imposed additional tariffs on some $250 billion in Chinese products. China has responded with tariffs of its own, affecting some $110 billion of U.S. goods and locking the two giants into what China’s Ministry of Commerce called “the biggest trade war in economic history.”
And it could get worse. Trump this month announced plans for a yet more tariffs aimed at an additional $300 billion in Chinese imports beginning Sept. 1.
Just like everyone has a unique Social Security number, every type of product shipped to the United States bears its own 10-digit classification code, known as the Harmonized Tariff Schedule code, or HTS.
The more similar the product types, the more similar the codes.
Dried black pepper is 0904.11.00.20, for example; dried white pepper is 0904.11.00.30.
When a new tariff appears, it affects a single HTS category. So even closely related goods can have wildly different tariffs. A simple switch from a 10 to 20 at the end of a code could reduce a tariff without raising suspicion.
For its analysis, GateHouse Media examined several pairs of similarly coded Chinese imports where one was subject to the increased tariffs and the other was not. The data, obtained from the U.S. Census Bureau, showed that imports of the affected products decreased after the trade war while those of the unaffected products increased.
“That’s a good approach,” Hufbauer said of GateHouse Media’s data analysis. “It just shows you how similar these products are and how hard it is to distinguish between one and the other.”
Take certain types of light bulbs, known as “lamps,” for example. Trump last year imposed a 10 percent tariff on discharge lamps — such as those using fluorescent and mercury — but not on LED lamps. Both share similar HTS codes.
The year before the tariff took effect, China exported $254 million in discharge lamps to the United States and about $1.5 billion in LEDs. The next year, with the tariff in full effect, Chinese discharge lamp imports dropped to $189 million and LEDs jumped to $1.7 billion.
Trump imposed an additional 25 percent tariff on discharge lamps in May.
Some of the volume change also might be due to the rising popularity of LED lights, which are more efficient.
Most cases of misclassification are probably unintentional, said Mike Watson, vice president and general manager of e-conolight at Cree Lighting.
LED “is a new type of technology, really less than 10 years old,” he said. “And you’re dealing with a lot of new companies that may or may not be well versed in classifying to begin with, so that would be an unintentional misclassification.”
But, he said, as tariffs climb, “some companies can be introduced to the dark side and creep into intentional misclassification.”
It’s hard to prove a direct relationship between the increased tariffs and the potential for increased misclassification. But several sources confirmed it is happening.
Guoxing Zhan, a freight broker in Shenzhen, China, said one of his clients called late last year seeking help after U.S. customs officials seized her cargo at the border. It was four months after the start of the trade war, Zhan said, and the client and her business partner were trying to skirt the higher fees.
“They miscoded,” Zhan said, explaining how they changed the HTS number of their product, an LED luminaire, to that of an LED lamp. The first had a tariff; the second did not. The ploy cost his clients more in fines and fees than they would have saved. And it ultimately caused the company to go bankrupt, he said.
“It’s so stupid,” he said. “They told me they unintentionally changed the numbers, but it’s so obvious that they didn’t want to pay extra money because of the higher tax. I can’t help with that.”
The trade war alone isn’t responsible for such misclassifications.
Months before it started, the United States slapped a 183 percent anti-dumping duty on all Chinese hardwood plywood imports. An anti-dumping duty is imposed on imported products sold below fair-market value.
Shortly afterward, some Chinese exporters tried to avoid the higher rate by shipping hardwood plywood under the code for softwood plywood, according to Timothy Brightbill, the lead counsel for the Coalition for Fair Trade in Hardwood Plywood.
The two types of plywood share the same first four digits of the HTS code — 4412 — but softwood plywood’s tariffs ranged from 0 to 8 percent at that time.
In 2012, a Chinese medical rubber manufacturer sought advice on an online import-export message board. He wrote that his American client had asked him to switch the code of his product from vulcanized rubber to surgical appliances in an attempt to lower duties.
He asked other message board users what to do.
“Follow your client,” many of them advised.
Even if misclassifications originated with the exporter, it’s the importer who incurs the penalty if caught, said John Heimsath, CEO of an import logistics and consulting firm in Texas.
“The importer of record is the one who’s liable for any misstatements on an entry, because it’s an importer’s responsibility to classify their cargo correctly,” Heimsath said, adding that importers can be American or foreign companies.
Texas-based University Furnishings was blamed for misclassifying wooden bedroom furniture imported from China under the code of office furniture. It cost the company $15 million to settle a lawsuit under the False Claims Act.
The U.S. Department of Justice said the company, which resolved the claim in 2015, had conspired with others from 2009 to 2012 to dupe customs officials and avoid paying anti-dumping duties. The company, however, continued to deny any liability or wrongdoing.
According to a U.S. Customs and Border Protection spokesperson, one of CBP’s priorities is to collect all anti-dumping duties to protect the U.S. economic security.
Unlike high-tech products that are “hard to duplicate,” according to Hufbauer, the senior fellow at PIIE, most foreign goods on the U.S. market, like textiles, have low profit margins.
They are easily affected by changes in the cost of goods and therefore are “very likely” vulnerable to misclassifications, Hufbauer said.
Pauline Tsu, the marketing director of New Dragon Fashion Company, said she misclassified Chinese-made T-shirts shipped to the United States several years ago. In doing so, she stood to avoid a U.S. import tariff.
But the T-shirts were stopped by Chinese customs agents.
“We paid 250,000 yuan for our mistake,” said Tsu. That is a fine of around $35,000 based on the most recent exchange rate.
The CBP collected some $40.6 billion in duties in FY2018 alone — a 23 percent increase from the previous fiscal year, mostly attributed to Trump’s new tariffs on China, according to a July CBP report.
The agency also issued fines totaling more than $92.1 million and, along with U.S. Immigration and Customs Enforcement, seized shipments valuing more than $1.3 million for tariff-related fraud and violations during the same time period, the report states.
It also launched 20 investigations, conducted 18 foreign onsite verifications and prevented the evasion of $100 million in duties in the past two years, according to the report.
The worst thing for an exporter, said Michael Mullen, a former CBP assistant commissioner, is to be on the CBP’s list.
Everything an “untrusted” company sends to the United States, he said, the “CBP is going to stop it and take a look at it.”
“Maybe they’re saving a small amount of money on the tariffs,” Mullen said, “but they’re taking the risk that CBP is going to find out that they’re doing that.”
Instead of taking that risk, some companies employ a different scheme for dodging tariffs: Rerouting freights from China to nearby countries not subject to the same U.S. duties.
Zhan, the Shenzhen freight broker, has helped Chinese exporters “transship” their goods through countries such as Malaysia, Vietnam and Bengal before they arrive in America, according to his social media profile.
He’s not alone. Another company, Kingtrans, promotes its transshipping services by email.
“I get emails from them all the time,” said Brightbill, the trade lawyer. “They said, ‘If you want to avoid anti-dumping duties, we can help you.’”
Kingtrans’ website said it saved clients more than $100 million in avoiding U.S. anti-dumping duties. Among its featured cases was the 2016 rerouting of stainless steel sinks from China to Malaysia to the United States to skirt the 76 percent anti-dumping duty.
The 14-year-old company’s owner, Kangbao Chen, confirmed to GateHouse Media that Kingtarns helped reroute household goods like ceramic mugs and bowls but refused to say how many shipments he handled after Trumps’ tariffs took effect.
The company’s website since has changed, but the previous version — along with the successful case stories — remain on the internet archiving website, The Wayback Machine.
The risk of trade evasion is ever-increasing because many imports are subject to both anti-dumping duties and Trump’s new tariffs, said a CBP spokesperson.
But some experts question the effectiveness of tariffs to penalize Chinese companies for the unfair trade practices Trump railed against.
For one thing, some companies will find a way to avoid the tariffs. And even when they pay, companies typically pass on the extra cost to American consumers in the form of higher-priced goods, said Zhi Wang, George Mason University professor and founding director of the Research Center of Global Value Chains at the University of International Business and Economics in Beijing.
“It actually hurts American firms and American customers,” Wang said.
Hufbauer, the senior economic fellow at PIIE, suggested countries would benefit from a bilateral free trade agreement, where misclassification and transshipping wouldn’t exist.
Such an agreement would place U.S. companies on a level playing field with foreign competitors, Hufbauer said, and this would increase productivity and benefit consumers.
“Now we’re in a political period where, you know,” Hufbauer said, “this is ignored.”
You Draw It: How might Trump’s tariffs affect Chinese imports?
The United States imposed steep tariffs on some $250 billion in Chinese products in 2018. A new round affecting some $300 billion worth of Chinese imports will start Sept. 1.
How do you think those tariffs will affect the total value of Chinese imports to the United States? Draw your guess on the chart below.
Check out our data: https://github.com/GateHouseMedia/Chinese-Imports