Chapter 6. Duty Savings Opportunities: Introduction to Trade Agreements, Unilateral Preference Programs, and Other Duty Savings Mechanisms

• Author: John Cobau, Paul Hegland, John B. Brew
• Pages: 105-145

CHAPTER 6

Duty Savings Opportunities:

Introduction to Trade Agreements,

Unilateral Preference Programs, and

Other Duty Savings Mechanisms

John Cobau

Paul Hegland

John B. Brew

OVERVIEW H

The basic rule when bringing products into the United States is that goods are

subject to duty upon importation, unless an exception to this rule applies. While

U.S. tariffs are generally low (U.S. tariffs average approximately 3 percent of the

value of a good), certain categories of goods carry higher tariffs, and U.S. tariffs

may exceed 00 percent of the value of some imported goods. Given the com-

petitiveness of the global marketplace, all importers seek opportunities to reduce

or eliminate tariffs applicable to their imports.

This chapter is divided into three sections. First, we discuss trade agree-

ments, such as the North American Free Trade Agreement (NAFTA), that have

been negotiated between the United States and other sovereign countries, each

of which has unique rules for granting goods duty-free treatment. These agree-

ments provide for reciprocal duty-free treatment for goods traded between the

countries that are parties to the agreement. Second, we discuss unilateral tariff

(or trade) preference programs, which are U.S. laws that allow duty-free treat-

ment or reduced duties on imports from certain less developed countries under

specific circumstances. Third, we discuss other duty savings methods, such as the

use of bonded warehouses, foreign trade zones, duty drawback, special tempo-

rary import processes, special U.S. legislation, and classification rules that allow

reduced tariff treatment to qualifying products and transactions.

A useful way to obtain an overview of the various duty savings options is

to review the Harmonized Tariff Schedule of the United States (HTSUS). As dis-

cussed in Chapter 3, “The Harmonized Tariff Schedule of the United States and

Tariff Classification,” the HTSUS sets out the applicable tariffs for all imported

105

Mr. Brew would like to thank Alex Schaefer, Counsel, Crowell & Moring, Nicole Jenkins, Associate, Crowell & Mor-

ing, and Annie Wartanian Reisinger, Associate, McGuireWoods, for their signi cant contributions to the drafting of

this chapter.

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goods. It is available at the U.S. International Trade Commission’s Web site,

http://www.usitc.gov. The rate applicable to imports that do not qualify for

a duty preference or exception is listed in the Column  “General” subcolumn

appearing on the corresponding line for the applicable HTSUS provision for the

good. For example, certain electric motors classified under HTSUS subheading

850.0.2000 have a “General” most-favored nation (MFN or normal) tariff rate of

6.7 percent ad valorem. The highest rate, listed in Column 2 (here, 90 percent),

applies only to goods from the very few countries ineligible for the MFN or nor-

mal rate, which at this time is only Cuba and North Korea. Imports of goods from

these countries are subject to a variety of restrictions and/or prohibitions. There-

fore, importers should contact legal counsel before doing anything that relates or

could lead to any type of transaction involving such goods.

Harmonized Tari Schedule of the United States (2009) (Rev. 1)

Annotated for Statistical Reporting Purposes

Heading/

Subheading

Stat

Suffix Article Description

Unit of

Quantity

Rates of Duty

12

General Special

8501 Electric motors and generators

(excluding generating sets):

8501.10 Motors of an output not

exceeding 37.5 W:

Of under 18.65 W:

8501.10.20 00 Synchronous, valued

not over $4 each

No. 6.7% Free (A,AU,B,

BH,CA,CL,E,

IL, J,JO,MA,MX,

OM,P,PE,SG)

90%

Many duty reduction or elimination programs are listed in the General Notes

to the HTSUS, which also provide the legal text for these programs. Each pro-

gram is designated by a unique letter or symbol. For example, the HTSUS uses

MX for goods that qualify for duty preferences under the NAFTA as Mexican

origin. If a good is Mexican origin under the NAFTA and an MX appears in the

“Special” subcolumn for the applicable ten-digit HTSUS subheading following

the word “Free,” the good is eligible for duty-free treatment. The MX tariff rate

for electric motors classified in HTSUS subheading 850.0.2000 is “Free.” Thus,

if the motors qualify under the terms of the NAFTA as Mexican origin, no duties

are owed upon importation of such products into the United States.

The HTSUS provides three primary methods to reduce duty payments dis-

cussed in this chapter, commonly referred to by CBP as Special Program Indica-

tors (SPIs). The HTSUS provides for trade agreements (described in the “Trade

Agreements” section), listed in HTSUS General Note 3(c); unilateral preference

programs (described in the “Unilateral Tariff Preference Programs” section),

also listed in General Note 3(c); and certain duty savings programs (described

in the “Other Duty Savings Methods” section), based on special tariff classifica-

tion requirements and provisions. This third category of duty-savings methods

includes goods meeting the terms of provisions in HTSUS chapter 99, which

106 CHAPTER 6

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covers goods entitled to temporary duty reduction or elimination under U.S. mis-

cellaneous tariff laws. Other special duty savings options found in the HTSUS

include goods meeting the terms of different provisions in chapter 98, which cov-

ers goods imported temporarily, U.S.-origin goods, goods previously imported,

certain textiles from lesser-developed countries, samples and prototypes, and

goods imported for U.S. government use.

PRACTITIONER’S TIP: Even if goods are eligible for tariff preferences, preferences will

not be provided unless they are properly claimed, documented, and supported. Even if a good

is from a country where the merchandise may be eligible for preferential treatment, a claim of

origin is not a claim for tariff preferences. Thus, it is up to the importer to determine if goods are

eligible for tariff preferences.

TRADE AGREEMENTS H

Currently, the United States has free trade agreements (FTAs) with 7 countries:

Australia, Bahrain, Canada, Chile, Costa Rica, Dominican Republic, El Salvador,

Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Peru,

and Singapore. Each FTA has been incorporated into U.S. law and the respective

domestic law of the other signatory countries. These agreements are intended to

promote trade between the United States and these trading partners by, inter alia,

reducing or eliminating duties on goods traded between them. These agreements

also provide other rules for cross-border transactions to create transparency and

lessen trade barriers between the United States and its FTA partners (contracting

countries of the specific agreement). In addition to these agreements, the United

States has negotiated FTAs or has ongoing FTA negotiations with Brunei Dar-

ussalam, Colombia, Korea, Malaysia, New Zealand, Panama, and Vietnam, but

either these agreements have not been put into effect or negotiations are not yet

completed.

There are two significant limitations on preferential treatment under these

FTAs. First, not all tariffs are eliminated at the time the agreements enter into

force; some products are subject to a period in which duties are phased out. The

phase-out periods are negotiated on a product-by-product basis and are set forth

in the annexes to the agreement. The applicable duty rate for the current year

will be set forth in the HTSUS based on the terms in the agreement. If tariffs on

goods are not eliminated immediately upon implementation of the agreement by

the signatory countries, then tariffs are typically phased out in equal stages over

five- or ten-year periods. Tariff phase-outs on certain goods may occur in equal

stages over 5 years or longer for goods that the importing country considers to

be trade sensitive. In extraordinarily limited circumstances, a specific trade sensi-

tive good may not receive duty-free market access.

Second, to obtain a tariff preference under an FTA, the good must “origi-

nate” in the FTA area. With all U.S. FTAs, if a good is wholly the growth, prod-

uct, or manufacture of the United States and/or the other FTA country, then it

qualifies for duty-free treatment under the particular FTA. For example, silver

Duty Savings Opportunities 107

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