January 19, 2021

Volume XI, Number 19

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A Rose By Any Other Name … May Carry A Higher Duty Rate

As countries work to harmonize international trading rules and develop bilateral and regional Free Trade Agreements (FTA), there remain certain international trade truths that all international traders should understand.  Central to those is the principle of tariff classification.  No matter the country, all imported products must be classified under the Harmonized Tariff System and will be assessed duty at the corresponding duty rate applied by the importing country.  This globally managed system of tariff classification is guided by the World Customs Organization(WCO) and applies to all WCO member states.

International trade truth number two is that all merchandise must be classified, and therefore assessed duty, based on its condition at the time of entry.  Tariff classification may be based on a variety of factors, including what a product is, its material composition, how it works, where it is used, and to whom it is sold.  Those international traders who understand tariff classification rules, recognize pitfalls and opportunities, and can identify FTA or other savings opportunities are at a competitive advantage to lower landed costs, avoid supply chain surprises, or unanticipated duty liability.

For example, when importing into the United States, United States Customs and Border Protection (CBP) has ruled that needled sutures are considered medical devices, eligible for unconditional duty free entry, whereas non-needled sutures are classified as pieces of thread subject to duties as high as 8% based on the constituent material, e.g., gut, nylon, silk.  However, if these same non-needled sutures are imported sterilized, they are again eligible for duty free entry.  To be aware of such nuances when establishing sourcing and supply chain activities would allow importers to consider all landed costs and manufacturing factors in order to best support supply chain and landed cost goals.

The battle over a product’s tariff classification can sometimes be worth millions, and given conflicting interpretations is sometimes less than transparent, depending on a variety of statutory rules of interpretation and product details.  For example, the Court of Justice of the European Union recently held that although dialysis equipment would not function properly where a dialysis bag is not properly fitted, the Court determined that the specially designed dialysis bag is not a “part” of a medical device (duty free), but rather simply an article of plastic (dutiable).  CBP has made some similar incongruous decisions, holding in one case that a urinary bag which includes measurement guides on the outside is a medical device (duty free), but the substantially same bag absent such measuring guides would be classified as an article of plastic (dutiable at 5.3%).

Bottom line is that those companies who incorporate tariff classification reviews within product sourcing and landed costs determinations will be better positioned to support product engineering and sourcing determinations to take advantage of duty savings opportunities under available tariff classification rules and existing precedent.  Moreover, advance coordination will also allow importers of pharmaceutical products and medical devices to identify available savings opportunities through existing international agreements such as the Nairobi Protocol to the Agreement on Importation of Educational, Scientific, and Cultural Materials, intended to reduce duties on products designed for the benefit of chronic ailments (e.g., diabetes, respiratory issues, visual or auditory impairment), even if CBP would otherwise classify them as articles of plastic; take advantage of new and existing Free Trade Agreements, such as the recently enacted United States-South Korea Free Trade Agreement; or simply avoid unaccounted for surprises and unanticipated duty liability.

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© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume II, Number 179
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About this Author

James Sawyer Trade Attorney Faegre Drinker Biddle & Reath Chicago, IL
Partner

James Sawyer counsels clients on critical import compliance issues and duty-savings opportunities, balancing business realities with effective internal control processes to meet importers’ legal obligations. He advises in all areas of U.S. import law and regulation, including tariff classification, valuation, origin determination and marking, free trade agreements and duty preference programs, and enforcement. James is a co-leader of Faegre Drinker's Chicago team.

Import Compliance Counsel

James frequently counsels clients on strategic sourcing and import compliance issues...

312-569-1156
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