Chemical Classification, It Matters, Now More Than Ever-To Most

If you have a company that imports chemicals – whether they are used as raw materials or components for onward manufacturing, or finished goods containing chemical components – you have been facing significant challenges over the last half-dozen years. Some of these challenges include the trade wars with China (I’m looking at you, Section 301) and the disruptive impact of COVID-19 to global supply chains. In response to these challenges, you have maybe modified your supply chain to reduce your dependence on Chinese chemical imports.  Or perhaps your supply chain was not largely affected by Section 301 tariffs (if so, consider yourself lucky – and may your luck hold!).

Donald Trump’s second administration seems poised to introduce additional challenges for you to navigate.  Importers are heading into more tumultuous times with potential increased tariffs not only for China, but with threatened tariffs against certain countries and even across the board (including looming question marks for how trade programs e.g., USMCA will be affected). This is a good time to reevaluate your supply chains once again in the face of this uncertainty. *

While there are many aspects to consider when assessing supply chains in light of the changing political landscape, be sure one you evaluate is the impact of tariffs.  The first step in evaluating the impact of tariffs is ensuring correct HTSUS classification.

What is the Classification?

Products of the Chemical or Allied Industries fall into Section VI, which includes Chapters 28-38.  Goods falling into Section VI span from chemical elements and discrete chemicals to products that contain several chemical components.  Classification is based on both the composition (which means chemical structure when dealing with discrete chemicals) and the intended function (use) of the goods.  Classification challenges may exist for new or novel chemical compounds, or for products that contain several chemical components and may have multiple uses since they may be covered by more than one heading.

As an importer, you are responsible for ensuring the correct HTSUS classification. But you are dependent upon the information that you obtain from your supplier.  Ensure you have all the information you need to classify. Take note that a Safety Data Sheet (SDS) may not be sufficient, as it may not list all components. Where possible, obtain the CAS (Chemical Abstracts Service) number for all components- if this is not possible, obtain unambiguous chemical names (which may be easier said than done!). Once you have a good understanding of the exact composition and intended use, consider all possible headings, apply the General Rules of Interpretation, and refer to CBP rulings for the same, or similar, goods.

Where is it “coming from”?

If you’ve been involved in trade for a while (or even for a short time) you know that this isn’t necessarily an easy question.  But it is integral to consider – and understand – to be able to evaluate the impact of tariffs on the import of your goods.

There are a few things to consider when determining where goods are “from” for tariff purposes.

A Country of Origin is required for marking purposes- details for how this is determined can be found in  either Part 134 for non-preferential goods or Part 102.11 for preferential goods (pursuant to USMCA) of the Customs Regulations.  But if you are considering whether your goods are subject to Section 301 duties (or the evolving landscape of additional tariffs)* because one or more components are from China (or another targeted country),* then an analysis for whether a substantial transformation resulting from a change in name, character, and use has occurred may be necessary. A substantial transformation analysis isn’t necessarily straightforward and must be done on a case-by-case basis.

Once you’ve determined Country of Origin and assessed Section 301 (or additional tariff)* applicability, consider if there are any relevant preferential trade agreements that the goods may be eligible for, such as the USMCA (if it is still intact when you are reading this!).*   The preferential trade agreement may include rules that are applicable to your goods including e.g. tariff shift (another reason classification is important), or it may rely on substantial transformation as with Section 301, or perhaps a Regional Value Content calculation is beneficial to you.

It is possible that where your goods are “coming from” differ when analyzed as described above—see Bruce Leeds’ recent article which reviews a CBP ruling where a plant fertilizer product was identified as having a Country of Origin for marking purposes as China, but it wasn’t subject to Section 301 duties and it was eligible for USMCA.  Certainly, a head scratcher!

For the chemical importers reading this, be sure to analyze the potential effects of new or proposed trade regulations by starting with a review of your classification and where your goods are “from.”  If you need help with navigating these changes, be sure to contact us.

*When this article was written in late January, additional tariffs on goods from China, Mexico, and Canada were in the proposal stage. With the first day of February came an announcement that Executive Orders imposing additional tariffs of 10% on “all articles that are products” of China, 25% on imports of “all articles that are products of Mexico”, and 25% on most imports (only 10% on “energy resources”) from Canada would apply to goods starting on February 4th. The announcement stated there would be few exemptions available; notably, no exceptions for items eligible for duty-free treatment under USMCA. On February 3rd, it was announced that the tariffs on Mexican and Canadian goods would be delayed by one month.  Tariffs targeting goods from the EU and the UK have also been mentioned.

I will be conducting a webinar with ICPA on Chemical Classification on March 18th. For more information:
https://conta.cc/42BLSUO