While U.S. president Donald Trump has said he will delay additional China tariffs, originally pegged for March 1, following unspecified “substantial progress” in bilateral talks, the official end date to the trade war remains conjecture. As trade talks between the two economic giants continue without clear resolution in sight, Hong Kong companies that would ordinarily be impacted by the tariffs are utilizing a little-used loophole to keep their companies afloat.
WHAT IS THE 'FIRST SALE' RULE?
In Hong Kong, businesses owners have taken concrete steps to escape Section 301 tariffs by employing the “First Sale” rule which, according to the Hong Kong Trade Development Council, has seen its usage increase dramatically over the past few months.
Under the U.S.-originated “First Sale” rule, duties are only levied on the initial sale from manufacturer to wholesaler, meaning importers need only apply duty to the price paid at the first sale of the goods, as opposed to paying the duty on the final price supplied by the importer, which is higher.
Craig Lewis, a partner at Hogan Lovells’ Washington, DC office who specialises in international trade and investment explains: “For example, where the article is sold by a foreign producer A to a foreign middleman B (the “First Sale”) who then resells the article to a US importer C (the “Last Sale”). Typically, in this scenario the First Sale would be lower than the Second Sale, meaning that duty liability would be lower if the First Sale could be used. Using the First Sale, therefore, will result in a lower value being used and lower duty liability. The amount of benefit depends on how much lower the First Sale is.”
Under the “First Sale” rule, those who import from mainland China to Hong Kong, before sending goods on to the U.S., would only have to pay tariffs on the first sale price between mainland China and Hong Kong, rather than between Hong Kong and the U.S., where duty costs will be higher.
But in order to for this to work legally, each transaction needs to be proved as legitimate, with relevant documentation to back it up. For those looking to implement this practice for their own business, the process can be time-consuming as users must be confident they can clearly map supply chain processes.
HONG KONG FEELING THE BRUNT
Despite a temporary truce between the two economic giants, trade relationships between China and the U.S. remain highly politicised, and Hong Kong’s unique position as a trade conduit to greater China has placed it in a vulnerable position.
The current economic impact of the tariffs on Hong Kong is hard to quantify, but experts have already pointed to the financial hub’s falling real estate values and the port’s loss of business as by-products of the aggressive trade tactics.
According to a statement by China’s commerce ministry, this threatens to be “the largest trade war in economic history to date”, and those operating in Hong Kong, with supply chains across the Mainland, don’t want to take any gambles.
“Presumably the interest in Hong Kong is higher than elsewhere because of the volume of multi-tiered transactions involving Chinese products and Hong Kong-based middlemen,” Lewis says of companies looking to implement the rule.
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