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

• Author: John B. Brew, Jini Koh, Mark Tallo
• Pages: 109-150

CHAPTER 6

Duty Savings Opportunities:

Introduction to Trade

Agreements, Unilateral

Preference Programs, and Other

Duty Savings Mechanisms

JOHN B. BREW, JINI KOH, MARK TALLO1

H OVERVIEW

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 g ranting 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

goods. It is available at the U.S. International Trade Commission’s website, http://

www.usitc.gov. The rate applicable to imports that do not qualify for a duty

pre ference or exception is listed in the Column  “General” subcolumn appearing

109

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110 CHAPTER 6

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 r ate 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 normal rate,

which at this time are only Cuba and North Korea. Imports of goods from these

countries are subject to a variety of restrictions and/or prohibitions. Therefore,

importers should contact legal counsel before doing anything that relates or could

lead to any type of transaction involving such goods.

Harmonized Tariff Schedule of the United States (205),

Annotated for Statistical Reporting Purposes

Heading/

Subheading

Stat

Suffix Article Description

Rates of Duty

Unit of

Quantity General

1 2

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,

CO, E, IL, JO,

KR, MA, MX,

OM, P, PA, 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 of 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 U.S. Customs and Border Protec-

tion (CBP) as Special Program Indicators (SPIs). The HTSUS provides for trade

agreements (described in the “Trade Agreements” section, next), 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 classif ication requirements and provisions. This third cat-

egory of duty-savings methods includes goods meeting the terms of provisions

in HTSUS Chapter 99, which covers goods entitled to temporary duty reduction

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Duty Savings Opportunities 111

or elimination under U.S. miscellaneous tariff laws. Other special duty savings

options found in the HTSUS include goods meeting the terms of different provi-

sions in Chapter 98, which covers goods imported temporarily, U.S.-origin goods,

goods previously imported, certain textiles from lesser-developed countries, sam-

ples and prototypes, and goods imported for U.S. government use.

H TRADE AGREEMENTS

Currently, the United States has free trade agreements (FTAs) with 20 countries:

Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic,

El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco,

Nicaragua, Oman, Panama, 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 trans-

actions to create transparency and lessen trade barriers between the United States

and its FTA partners (contracting countries of the specif ic agreement). In addition

to these agreements, the United States has recently completed or is actively nego-

tiating two additional FTAs: the Trans-Pacif ic Partnership (TPP) and the Transat-

lantic Trade and Investment Partnership (T-TIP).

The TPP agreement is an FTA among 2 countries throughout the Asia-

Pacific region: the United States, Australia, Brunei Darussalam, Canada, Chile,

Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. TPP is

touted as a broad 2st-century agreement that seeks to eliminate tariffs and non-

tariff barriers to trade in goods, services, and agriculture and to establish rules

on a wide range of issues including foreign direct investment and other economic

activities that are increasingly present in a globalized economy. The TPP agree-

ment deals with everything from financial services to telecommunications to sani-

tary standards for food and will require significant legal and regulatory changes

for some negotiating countries. To underscore the size of the agreement, the TPP

negotiating parties are home to 40 percent of the world’s population and account

for nearly 60 percent of global GDP.2 At the time of publication, the TPP has not

been implemented into U.S. law.

The other agreement currently in negotiation is T-TIP, the proposed FTA

between the European Union and the United States. Like TPP, the United States

and European Union envision T-TIP as a comprehensive and high standard

2st-century FTA. T-TIP seeks to () increase transatlantic market access through

the elimination of bar riers to trade and investment in goods, services, and agri-

culture; (2) enhance regulatory coherence and cooperation; and (3) develop new

rules in areas such as foreign direct investment, intellectual property rights, labor,

and the environment. While not as large as the TPP in terms of its share of U.S.

trade, T-TIP countries account for nearly half of the global GDP and have invest-

ments in excess of $3.7 trillion in each other’s economies.3

There are two significant limitations on preferential treatment under these

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

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