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Food and supplement industries battle sharply higher tariffs

Tariff increases of 25% on many dietary ingredients threaten both businesses and consumers, and new tariffs from foreign countries threaten U.S. exports

The dietary supplement and food industries face continued tariff challenges, including a recent increase to 25% for many dietary ingredients imported from China and new retaliatory tariffs from India on nuts and produce coming from the U.S. Industry leaders, including several trade associations, have fought the tariffs via Congress, submitting comments and participating in public hearings on the China tariffs, but exclusion from the tariffs is far from a guarantee.

President Donald Trump and China president, Xi Jinping, agreed at the G-20 economic summit in Japan on June 29 to refrain from imposing any new tariffs while they restart trade talks. This puts a halt to the pending List 4 tariffs that would essentially cover the approximately US$300 billion in remaining imports from China not included in the first three lists of tariffs, including several dietary ingredients—many other dietary ingredients appeared in List 3.

While the Trump administration approved an exclusion process that will apply to the many dietary ingredients already subject to the higher tariffs, the exclusions for the earlier waves of tariffs were few and took a long time to process.

At G-20, Trump also spoke to India’s Prime Minister Nerendra Modi about the recently enacted tariffs by India on nuts and produce imports from the U.S., including apples, walnuts and almonds. The tariffs were widely seen as retaliation for the early June removal of India as a U.S. preferred trade partner—the Trump administration said India did not give the U.S. “equitable and reasonable access to its markets.”

Trump administration said India did not give the U.S. “equitable and reasonable access to its markets.”

No immediate halt occurred on the tariffs from India, but Trump hinted a “very big trade deal” was in the works.

Thousands of almond growers in California supply more than 80% of the world’s almond supply and have been significantly impacted by tariffs imposed by China. The USDA included almonds in a financial package to support farmers and ranchers impacted by a range of Chinese tariffs, but the new tariffs from India, which the Almond Board of California said is a huge market for almonds—US$650.6 million annually, out of $4.5 billion total U.S. exports—was even more significant as an alternative export country during Chinese tariffs.  

If trade wars with China and India were not enough for the food and supplement industries to deal with, Trump’s threatened tariffs against Mexico could be reinstated if he is not satisfied with efforts by Mexico’s efforts to help curtail illegal immigration. These tariffs could affect food products such as tomatoes, avocados, onions and snack foods.   

Dietary ingredients’ role in the trade war

The broader and more immediate tariff challenge for the natural products industry is from the so-called List 3 tariffs that cover around $200 billion in goods imported from China, including many dietary ingredients. IngredientsOnline.com, which connects U.S. manufacturers and brands with Chinese suppliers, listed several ingredients on List 3 such as minerals, amino acids, choline, creatine, xylitol, animal and plant proteins, ribose, phytosterols and hemp seeds. Other companies noted various fish oils, seeds and seed oils, sugar alcohols and alternative sweeteners, plant and animal fatty acids, plant and animal protein concentrates, and glucosamine were all on List 3.

In May 2018, the Trump administration produced List 3 with an initial 10% additional tariff after China implemented retaliatory tariffs to his List 1 and 2 tariffs. Trump threatened the 10% tariff—ad valorem, so on top of existing tariff (a 3% existing tariff would become a 13% tariff)—could rise to as much as 25% Jan. 1, 2019, if there was no agreement to end or cool the trade war.

A cease-fire in the trade war between Trump and Xi in December 2018 delayed the 25% tariffs for at least 90 days, but when no agreement was made, Trump enacted the 25% tariffs on May 10, 2019.

Then Trump called for a 25% tariff on all almost all remaining imports from China, totaling around $300 billion, and the U.S. Trade Representative (USTR) released List 4 on May 13. This fourth tranche of imported ingredients included many forms of protein (isolates, casein, milk protein concentrate, egg albumin) and several edible oils (soybean, peanut, olive, sunflower, cottonseed and palm oils). The Global Organization for EPA and DHA Omega-3s (GOED) reported List 4 includes a line item for fats and oils and their fractions from marine mammals.

The USTR public hearings on List 4 were held June 17 to 27 in Washington. Public comments were due by June 17, with post-hearing rebuttal comments due seven days after the last hearing. The final list of 25% tariffs was expected to become effective as early as July 2, until Trump’s agreement at the recent G-20 summit put it on hold.

However hopeful of an agreement heading into the G-20 meetings, the food and supplement industries have been proactive about mitigating the tariffs’ effects.

“Trade wars are not easy to win,” John Mullen, senior advisor, McLarty Associates, said at the recent 7th Annual Legal, Regulatory and Compliance Forum on Dietary Supplements hosted by the American Conference Institute (ACI) and the Council for Responsible Nutrition (CRN) in New York on June 18. “Involvement in one is not only a threat for our country and the world, but also the dietary supplement industry, given its dependence on China for ingredients and materials, the scarcity of alternative sources and the market in China for finished [U.S.] products.”

Natural products industry springs into action

U.S. food and supplement companies have been seeking alternatives sources, where possible, and working with Chinese partners to limit the cost increases to the final consumers. 

In Washington, industry trade groups and stakeholders have been talking to members of Congress about the effects of the tariffs on the economies and consumers in their jurisdictions and the entire country. And the Natural Products Association (NPA) has testified at two separate hearings for List 3 and 4 proposed tariffs.

The efforts have borne some small fruit. For instance, the natural products and other industries called for an exclusion process for List 3, which never materialized despite such processes for Lists 1 and 2 last year.

“The process has been long and tedious, but we have an exclusion process [for List 3] which will begin on June 30,” said Daniel Fabricant, Ph.D., president and CEO of NPA. “While that fight is won, we still have a lot of work to do because the natural products industry was just hit with the proposed List 4 China 301 tariffs earlier this month. List 4 includes many new dietary ingredients used in dietary supplements as well as personal and home care ingredients and products.”

However, industry’s expectation of exclusion approval should consider the approval trends for exclusions from Lists 1 and 2, which started last year.

“There are about 11,000 [exclusion] requests [as of May 16, 2019] for List 1 that were submitted, and to date they’ve approved 2,420,” said Laura Siegel Rabinowitz, special counsel, Kelley Drye & Warren LLP, who co-presented with Mullen on tariffs at the ACI/CRN legal and regulatory conference. “They have not yet granted any exclusion requests on List 2 and have denied … plenty.”

In his testimony, Fabricant noted,” As the formal exemption process for any company is taking longer than 90 days for USTR to respond and can take as long as six months, companies must plan now as to where to source their ingredients and set up new purchasing agreements.”

He added even if the List 4 tariffs do not go into effect, companies still lose because they may have had to sign new sourcing agreements that are not economically advantageous in the long run.

Not in line with goals of trade war

To make a broader case for exclusion of dietary ingredients during the public comment period, industry has argued the tariffs will hurt U.S. natural products companies and blunt the economic gains from the industry, as well as cost consumers in both the pocketbook and their health.

“Imposing additional tariffs on dietary ingredients used in dietary supplement products would be neither practicable nor effective to obtain the elimination of China’s acts, policies and practices,” Fabricant said, in his List 4 hearing testimony, noting the tariffs on dietary ingredients would not level the playing field, but threaten the existence of small and medium-sized businesses.

“The dietary supplement industry receives significant ingredient innovation from new, small business start-up companies,” he explained. “It is that ingredient innovation which drives future product sales for this industry. Any disruption of the raw material supply chain through tariffs on ingredients sourced from China will curtail innovation, decrease future sales, and flatten the expected CAGR [compound annual growth rate] for the dietary supplement and natural product industries.”

In response to the proposed List 4 tariffs, submitted comments from CRN via James Griffiths, senior vice president of international & scientific affairs for CRN, stressed dietary supplement and functional food products are not among the list of products that logically belong with industrial materials in the aerospace, information communication technology, manufacturing machinery, medical instruments and steel industries. “Dietary supplement, functional food, and natural product raw materials and ingredients have not been caught up in the dispute regarding technology transfer and intellectual property [IP] policies,” he wrote.

Stolen technology and IP are among the conclusions of the investigation of China and other international partners under Section 301 of the Trade Act of 1974  that started this trade war. The USTR issued a report on the investigation’s findings in March 2018, stating, “USTR… determined that numerous acts, policies, and practices of the government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory, and burden or restrict U.S. commerce.”

Armed with the findings of the investigation he requested, Trump levied a 25% tariff on List 1, about US$34 billion of goods imported from China, including machinery and medical devices. He followed this with List 2 tariffs of about $16 billion worth of Chinese imports.

“Harming U.S. businesses and American consumers is inconsistent with USTR’s own criteria for selecting appropriate Chinese exports for imposition of duties in response to the Section 301 Investigation,” noted Michael McGuffin, president of the American Herbal Products Association (AHPA), in submitted comments for List 4.

For some ingredients, commenters noted no U.S. source exists, so there is no industry to protect with tariffs.

 “The U.S. is not a Pumpkin Seeds producing country,” wrote the China Chamber of Commerce of Import and Export of Foodstuffs and Native Produce and Animal By-products (CFNA), noting China produced 250,000 tons of pumpkin seeds and exported 20,800 tons to the U.S. in 2018. “The pumpkin seeds industry of the U.S. does not need to be protected by tariffs, and there is not any pumpkin seeds grower or group that would be protected.”

CFNA submitted similar comments for pine nuts.

A common refrain in submitted comments from the natural products industry was that for some ingredients, China is the primary or only source, and developing U.S. sources would take a long time and huge investment, if it were even possible.

“Many key ingredients used in the manufacture of U.S. dietary supplement, functional food and other natural products are constrained to their availability (geographic areas where they can only be grown or only produced in China), and there are very limited (or no) supplies and/or availability of these ingredients from alternative sources,” said Nature’s Bounty Co., in submitted comments.

The company stressed increased tariffs for ginseng, vegetable saps and extracts, and mannitol would be “problematic” and unfairly affect U.S. interests. “It should be noted that there are no non-Chinese alternatives or the alternatives that may be available are scarce or overly expensive,” the company underscored.

Scott Steinford, founder of the CoQ10 Association, noted coenzyme Q10 (CoQ10) as a raw material ingredient is almost completely manufactured in China, with about 800,000 kgs (~$160 million) currently imported annually. The raw material from China is manufactured into finished dosage form in the U.S., contributing to more than 300 significant U.S. CoQ10 brands.

“The economic impact of a 25% ad valorem tariff from a strictly retail perspective would be an estimated $40 million realized from the tariff,” he wrote, in submitted comments, highlighting an expected increased cost slate to the American consumer of about $200 million. “Based upon forecasts, the retail impact of a 25% ad valorem tariff on US consumers would exceed $400 million annually by 2020.”

Steinford singled out a CoQ10 manufacturing facility created in Pasadena, Texas, in 2006 with a maximum capacity of about 10% of the current total market demand. “That plant signed an agreement in 2017 with a Chinese manufacturer to purchase and distribute Chinese manufactured CoQ10 raw material,” he said. “The cost of production at the United States facility is estimated to be double the cost of production in China, so a 25% tariff would not serve any purpose to support United States production.”

Even when additional sources of an ingredient are available, switching sourcing to the alternative country may also be undesirable, at least politically.

The two largest sources of licorice extract products are China and Iran, according to submitted comments from Peter Caputa, chief operating officer for Wixon Inc., who noted his company imports over 500,000 lbs. of licorice extracts.

“I believe that imposing tariffs on these products will not only result in product cost increases here in the United States, but will also work to the benefit of Iran, as their products will clearly have a worldwide cost advantage,” Caputa advised.

He further speculated that while ethical organizations in the U.S. clearly understand the legal implications of using Iranian product, less ethical organizations may attempt to use and disguise what will be significantly cheaper Iranian product.

“A trade policy which clearly benefits a country that presents the U.S. with significant risks (Iran) would appear to be contrary to what I believe the administration is trying to accomplish,” he reasoned.

Winners and losers

Echoing much of the U.S. natural products industry, Wilson Lau, vice president of Nuherbs, said his U.S.-based company wants a level playing field and fair competition so businesses can prosper and create more jobs. 

“But these tariffs will have the opposite effect, and most definitely on the companies that use Chinese herbs, which would all go up in cost 25%, overnight,” he warned, in an emailed statement.

He called tariffs a tax on imports and noted not only do these tariffs make prices higher, they make planning unpredictable. “And since many contracts say you have to give notice before raising prices, you can’t plan for increased costs when prices are abruptly raised across the board,” he added. “Innumerable American companies will not have time to adjust, and the losses will be staggering.”

For Nuherbs, which specializes in the importation of herbs from China, the tariffs are a disaster, Lau lamented. “There is only one commercial source for authentic Traditional Chinese Medicine herbs: China,” he explained. “For our class of goods, like many others, these tariffs will hurt the American public, American businesses, and American employees because there are no alternative sources for Chinese herbs.”

These dire warnings were reflected in many comments submitted to USTR by supplement and food companies.

“The proposed 25 percent tariffs on herbal plant extracts and gelatin capsules … will have a devastating impact on the domestic dietary supplement industry, and will directly impact the health and welfare of hundreds of millions of American consumers who use dietary supplements and who will bear the inequitable burden of inevitable price increase,” warned comments submitted on behalf of Nutraceutical Corp.

The company further reported its bottom line would be eroded by the proposed increased tariffs, which will force a substantial increase in the retail price of dietary supplements sold at food and health store retailers that incorporate the impacted ingredients. This could also hinder the company’s domestic growth and ability to offer jobs, not to mention boost its foreign competitors that will not be facing the 25% increase in their ingredient costs.  

“The Chinese markets for these products are substantial and mature, and the Section 301 tariffs are unlikely to have a meaningful impact on Chinese production and sales,” the company advised. “In other words, the tariffs will harm American companies and consumers, and have no material impact on China.”

This point is underscored by comments submitted on behalf of Bright Pharma Caps Inc., which is the main importer of empty cellulose capsules made in China— capsules are manufactured by one factory there. The capsules are used by pharmaceutical, vitamin and food supplement companies.

“Bright understands that Chinese production of capsules are primarily for domestic consumption,” the company said, noting the effect of tariffs would be minimal on China but drastic for Bright and other small and medium-size companies that import the product. “Given its experience in the industry, and that of the factory in China that it uses, demand and consumption in China will easily absorb the production now going to the United States.”

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