Bill Russo, CEO of advisory firm Automobility Limited, which is based in Shanghai, said the Duty Drawback program offers a way for Chinese-affiliated automakers to “bridge the moat” of U.S. import tariffs.
“Geely owns Volvo, and Geely is trying to find a way across the moat,” Russo said. “China finds a way.”
Industry analyst Michael Dunne said the drawback program threatens to “throw the doors open” to imported Chinese-made vehicles by creating an end run around the tariff.
Both the Trump and Biden administrations “have been crystal clear that Chinese imports are non-grata here in the U.S.,” said Dunne, CEO of ZoZo Go, a consultancy specializing in Asian car markets. “It’s a complete setback for everything the United States is trying to do to build up its own EV industry and battery supply chain.”
Duty Drawback, enacted in 1789 as part of the Original Tariff Act, allowed for the refunding of duties, taxes, fees and tariffs paid to Customs and Border Protection on merchandise imported into the United States that is subsequently exported or destroyed.
The Trade Facilitation and Enforcement Act of 2016 modernized the program allowing greater flexibility in matching import and export activity for drawback reasons. Lancaster said that under the Substitution provision of drawback, an export to countries not in the United States-Mexico-Canada Agreement can be matched to an import that shares the same eight- to 10-digit tariff classification number.
Unlike U.S. foreign free trade zones and other tariff avoidance strategies, the drawback program is retroactive, allowing automakers to recoup duties paid on already imported vehicles.
Lancaster said this enables businesses to get import duties and fees refunded that otherwise might not be recoverable.
A former U.S. Trade Representative official said the revised duty drawback program “undermines to some degree” the intent of U.S. trade policy toward China by lowering the financial barrier to entry for vehicle imports.
“However, drawback incentivizes exports of similar goods, encouraging economic activity in the United States,” said the source who requested not to be identified. “So from a policy standpoint, it’s probably net neutral.”
Michael Cerny, Drawback committee chairman at the National Customs Brokers & Forwarders Association of America Inc., said the trade program incentivizes companies to invest in U.S. manufacturing.
It aims to “foster exports from the United States,” Cerny said. “You’re taking the (China tariffs) and using them in a way that brings American jobs.”
The auto industry commonly uses duty drawbacks to import auto parts from China cost-effectively. But few automakers import fully assembled vehicles from China. Ford joins the club next year when it begins importing the redesigned Lincoln Nautilus.
“The Japanese and German OEMs have never needed [drawback] because the duty on car imports is low,” Dunne noted. “And for trucks and SUVS — subject to the 25 percent Chicken Tax — they invested in factories inside the U.S.”
But unlike the German and Asian transplants, Volvo and Polestar lean on Chinese factories to produce U.S.-market vehicles. Volvo’s 150,000-unit South Carolina assembly plant has less than half the production capacity of BMW and Mercedes factories in the U.S.
Russo said the Germans “have no moat to cross,” given their substantial industrial footprint in the U.S.
