How the US-China Trade War is Affecting the Cannabis Industry, and How to Avoid the 25% Tariff

The ongoing U.S.-China trade war has affected numerous industries. Certain companies in the cannabis industry, however, have already started to feel the impact of tariffs.

As discussed in a recent report by CannaLawBlog, numerous products and components from the hemp and marijuana industries could be subject to increased tariffs of 25%.

A significant number of products and components come from Chinese suppliers. If American companies want to avoid high tariffs, then they need to find new suppliers. Otherwise, costs are going to be passed onto consumers. Or, companies are going to find their prices are no longer competitive.

Which Cannabis and Hemp Products Are Affected by the New U.S. Tariffs?

The Office of the U.S. Trade Representative (USTR) recently published a notice in the Federal Register confirming that President Trump is increasing tariffs from 10% to 25% on $200 billion worth of Chinese products.

The products now subject to a 25% tariff include several products and components related to the hemp and marijuana industries, including:

• Cigarette paper
• Hemp seeds
• True hemp products
• Other manufactured tobacco, tobacco substitutes, tobacco extracts or essences, and other products to be used in products other than cigarettes
• Folding cartons, boxes, and cases of non-corrugated paper or paperboard

Dozens of other products are also expected to be subject to 25% tariffs. The products listed above obviously play a crucial role in the cannabis and hemp industry. Not only will rolling papers be subject to tariffs of 25%, but hemp itself will also be subject to tariffs.

This news comes at a bad time for Chinese suppliers and their American importers: China has recently ramped up production of hemp-derived cannabidiol (CBD) products. Today, many American companies already import these CBD products and sell to U.S. consumers.

When Do I Have to Pay Tariffs? Which Products Are Impacted By Tariffs?

Right now, the five product categories listed above are the ones most likely to impact cannabis and hemp producers in the United States. Goods in all of those categories will be subject to a 25% tariff.

The tariffs took effect at 12:01am EST on May 10, 2019.

Here’s how the tariffs are described, as mentioned by CannaLawBlog:

“[Tariffs apply] to goods (i) entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on May 10, 2019, and (ii) exported to the United States on or after May 10, 2019.”

In more straightforward terms, any goods that left China on or after May 10 will be subject to the 25% tariff.

What To Do When Impacted By Tariffs

If you believe your hemp or marijuana business is going to be impacted by the 25% tariffs, then you may be worried about rising costs. A 25% jump in costs is hard for any business to absorb. Passing that cost onto consumers can cause your company to become less competitive.

So what should you do?

One thing you shouldn’t do is try to avoid tariffs by running goods through tariff-free countries. This is called “transshipping”. Chinese suppliers might claim that you can avoid tariffs by having products shipped from China to Vietnam, Taiwan, Malaysia, or Thailand before being shipped to the United States.

As the CannaLawBlog team explains, this is illegal and can lead to fines and jail time for American importers:

“This sort of “transshipping” can and does lead to massive fines and to JAIL TIME. I am not kidding. Just by way of one example, [there was] a very recent case…where a company paid US $62.5 million “to resolve allegations that it evaded $36 million in antidumping duties.”

That case involved Univar USA Inc. (Univar). The company imported 36 shipments of transshipped saccharin between 2007 and 2012. The saccharin was manufactured in Chines and then shipped through Taiwan to evade a 329% anti-dumping duty that applied to saccharin from China.

Here’s how the Department of Justice explained the case – including the reason why this behavior can be harmful to the U.S. economy:

“Transshipment of merchandise through third countries to evade antidumping duties undermines the integrity of our trade laws and puts domestic manufacturers at risk from unfairly traded merchandise.”

“We enforce our laws against importers who fail to take all reasonable steps to vet their suppliers and determine the true country of origin of their merchandise.”

Lying about the origin of imported goods into the United States can lead to up to 20 years in federal prison.

In the cannabis industry, lying about the origin of imported goods could also lead to the termination of your cannabis license. It’s possible that a company that spent millions of dollars building extensive production facilities would have to close down because their license was removed after trying to circumvent tariffs.

Your Competitors Could Alert Authorities to Your Transshipping Behavior

One of the biggest deterrents against transshipping is the False Claims Act, or FCA. This act allows individuals or companies to bring “qui tam” lawsuits against individuals or companies that defraud the federal government.

Because of this system, your transshipping behavior could quickly get caught.

Qui tam lawsuits are frequently used to attack competitors. It’s a way to keep industries honest: competitors are constantly looking for ways to shoot down competition, and qui tam lawsuits are one great way to do that.

A qui tam lawsuit allows the reporting individual or company to receive 15 to 30% of the damages that the U.S. government would recover from the lawsuit. Qui tam lawsuits can lead to double or even triple the amount of damages as an ordinary lawsuit.

It’s not just your competitors who could initiate a qui tam lawsuit for transshipping; your importers, your employees, or even your Chinese manufacturers who told you transshipping through Taiwan was legal may initiate a qui tam lawsuit.

In layman’s terms, if anyone knows that you are illegally transshipping goods from China through a third party country before importing into the United States, that person could make millions through a qui tam lawsuit. There’s a huge incentive to report anyone in the industry for transshipping.

Transshipping Behavior Isn’t Always Obvious

Sometimes, American companies will import goods from China without knowing it.

Let’s say you’re trying to buy rolling papers from a factory in Vietnam. That factory appears to offer cheaper prices than any company in China because they avoid the 25% tariffs charged on Chinese rolling papers.

You buy the rolling papers from the Vietnamese factory. Later, you’re hit with a qui tam lawsuit because the factory in Vietnam isn’t actually producing anything: they’re simply importing rolling papers from China before exporting them to the United States.

In this situation, you failed to do your due diligence. You are required to verify that all imported products come from genuine sources.

If you suspect your Vietnamese producer is not actually making anything, and you visit the factory to confirm that they’re not making anything, then you have done your due diligence. If you fail to do this, then you could be faced with costly lawsuits.

Chinese Companies Want to Ship to the U.S. Above All Else

Part of the problem with transshipping for the cannabis and hemp industry is that Chinese exporters and U.S. importers have different interests.

The Chinese company wants to ship product to the United States above all else. The Chinese company may tell the American company anything with that goal in mind.

The American company, meanwhile, wants to access lower-cost products while avoiding criminal liability, costly duty fees, trouble with U.S. customs, and forfeiture of a cannabis license.

With these goals in mind, the Chinese company might say anything to convince the U.S. company that they will face no further penalties, including:

• The Chinese company might claim to ship the products through Taiwan and have them labeled as Taiwanese products to avoid tariffs. If an American importer imports products from Taiwan knowing they’re really from China, then this is a criminal act that could be subject to U.S. customs law and massive penalties under the False Claims Act.
• A Chinese company might claim the American company can avoid any problems by being listed as the consignee of the products and not the importer of record because it is the importer who is at risk. This is also incorrect, according to CannaLawBlog.
• The Chinese company might claim that if certain assembly is done in a neutral third country, then the product will no longer be charged a tariff. The Chinese company might claim they will assemble the products in China, then ship the products to Vietnam where they’ll have a plastic case slapped onto them. This will not qualify the product as being ‘Made in Vietnam’, and the product is still subject to Chinese tariffs.
• Generally, the law states that a product needs to be “substantially transformed” in a country to qualify as being ‘made’ in that country. A ‘Made in China’ product needs to be “substantially transformed” in a third country before being shipped to the United States to avoid duties.

Understandably, cases like this can get complicated quickly. How much of a product needs to be manufactured in Vietnam before it can be considered a Vietnamese product? In this situation, you may want to hire a trade and customs lawyer.

How to Protect Your Hemp or Cannabis Company from 25% American Tariffs

Some of the strategies your company can use to protect yourself from the impact of American tariffs on China include:

• Investigate which products are affected by the 25% tariff, including cardboard boxes, rolling papers, electronic cigarettes, and various other components coming from China.
• If you raise prices 25% to cover the new cost of the tariffs, will your products still be competitive with your competitors’ prices? Or will your products be overpriced?
• Where do your competitors get your components? If most of your competitors get their components from China, then prices might go up 25% industry-wide, in which case your prices may remain competitive regardless.
• The U.S. government has suggested that certain companies will be able to secure an exemption from tariffs for certain products (which was also true during the last round of tariffs). However, this exemption may be more difficult for hemp and cannabis producers (given the federal stance towards the industry), and the exact exemption application process has not yet been revealed.
• You can also file an exclusion request (which is different from an exemption request). An exclusion request requires you to submit a request identifying the product you want excluded, including the Harmonized Tariff Schedule (HTS) number used to declare the product when entering the United States, a description of the physical characteristics of the product, the total American consumption and production of the product, and the basis for requesting the exclusion.
• To qualify for an exclusion, you might need to prove that the product is unavailable from a domestic U.S. supplier, or that there are certain requirements that only the Chinese supplier can satisfy. If you can prove that there’s no other viable source in the world that your Chinese exporter for your specific required type of product, then you may qualify for an exclusion.
• Do not attempt to tranship products from China through another country to avoid tariffs; this can lead to enormous consequences and, thanks to qui tam lawsuits, it’s easy to get caught.

How to Get Your Hemp or Cannabis Products to Qualify for an Exclusion on the 25% Tariff

The goal of a tariff is to convince American companies to use alternative suppliers. However, certain American companies have no choice but to use specific Chinese suppliers.

If your company genuinely cannot import the product it needs from any company but the one in China, then you may qualify for a tariff exclusion.

Qualifying for a tariff exclusion requires you to provide the following information:

• Identify the product you want excluded from tariffs, including the Harmonized Tariff Schedule (HTS) number of that product (the number used to declare the product upon import into the United States), as well as any other numbers used to identify the product (like industry certificates or quality standards – an STM or DIN, for example)
• A description of the product’s physical characteristics, including its chemical composition, metallurgical properties, or dimensions, that would make your product unique from other products that will be charged tariffs
• The reason for requesting the exclusion – is the company in China the only company in the world capable of producing that product to your exact specifications? Are there no American suppliers capable of producing that product? Are there no producers in countries other than China that can produce that product?
• The names and locations of any producers of that product in the United States and other foreign countries
• The total U.S. consumption of the product by quantity and value for each year of the past 3 to 5 years, including projected annual consumption of the next 3 years, including a basis for these projections
• An explanation of why U.S.-equivalent substitutes cannot be used in place of the imported products from China
• An explanation of why your company deserves to be excluded from tariffs; you might tell a story about how you’re a fifth-generation family-owned business with a long history in America, for example, or highlight the strategic significance of your company’s products or jobs in a certain part of America

If your exclusion request is successful, then you might avoid the 25% tariffs from the United States government.

If your exclusion request is unsuccessful, then you may be required to pay 25% tariffs on certain hemp and cannabis products and components that left China on or after May 10, 2019.

More Tariffs May Be Imposed in the Future

Tariffs started at 10% before increasing to 25%. However, the tariffs may increase in the near future. President Trump has threatened to impose 25% tariffs on the remaining $325 billion of Chinese goods imported every year into the United States. If the U.S.-China trade negotiations do not lead to a “good” deal for the United States, then these tariffs could be imposed in the near future.

In other words, even if your Chinese products are not currently on the list above, they could be affected by future tariffs.