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Regulatory Focus™ > News Articles > 2020 > 6 > Update on trade issues affecting the dietary supplement industry

Update on trade issues affecting the dietary supplement industry

Posted 23 June 2020 | By Kristi Wolff, JDMelissa Brewer, JD 

Update on trade issues affecting the dietary supplement industry

This article discusses recent updates on US trade policy issues in the dietary supplement industry. It focuses on the trading relationship between the US and its largest trading partners, including China, and analyzes the ongoing effects of current trade policies on companies that produce, buy, and sell dietary supplements. The authors discuss tools available to US companies to reduce financial liability when trade policies are evolving at a rapid pace.
US trade policy has been anything but quiet in recent years. The current administration is focused on trade as a central component of its economic policy and has relied on trade tools and policies that had been dormant for decades. The administration describes its approach as making “fundamental changes to US trade policy” to benefit US companies and workers – including reshoring supply chains, encouraging US companies to reduce their business in China, and ensuring that there is significant capacity to produce articles that touch on national security, including medicines, steel, and aluminum.1
In the last two years, these trade tools have included the application of tariffs on imports of numerous Chinese goods under Section 301 of the Trade Act of 1974, an updated United States-Mexico-Canada Agreement that replaces the 1994 North American Free Trade Agreement between the three countries, and a “phase one” trade agreement between the US and China.2 The administration’s 2020 trade agenda promises more changes to US trade policies, including increased enforcement of trade laws and agreements; potential new trade agreements with the United Kingdom, European Union (EU), and Japan; and further negotiations with China for an anticipated phase two trade agreement. For US companies, a rapidly evolving trade landscape could be a double-edged sword in that it presents novel opportunities for companies in the US and abroad but also creates a degree of uncertainty that must be taken into account.
The US-China trade relationship
The relationship between the US and China is currently center stage in trade policy. After years of negotiations on various trade frictions, the two countries announced a “phase one” trade agreement in January 2020 that creates new obligations by China regarding patents, trademarks, trade secrets, and pharmaceutical-related intellectual property and enhances enforcement against counterfeit goods.3 The Phase One Agreement also contains important implications for US companies doing business in China because it prohibits China from pressuring US companies to turn over their technologies as a condition of market access, business advantages, or any licensing approvals.4 This deal will have wide-reaching effects for US and Chinese companies and it lays the groundwork for a phase two deal in the future.
Ongoing negotiations between the US and China will have long-lasting effects for dietary supplement companies that import Chinese goods or export to China. For example, 80% of the raw material ingredients used to produce US manufactured vitamins and dietary supplements originate in China.5 Chapter 3 of the Phase One Agreement is devoted to trade in food and agricultural products, and requires China to create a regulatory process that will facilitate US exports to China of various agricultural products, including certain dietary supplements.6 The Phase One Agreement also increases market access opportunities in China for certain US dietary products, such as fish oil. China committed to increasing imports of US goods over the next two years by at least $200 billion, from the 2017 baseline value. The list of products China committed to import as part of that increased value includes essential oils, various types of seeds (oil, flax, sunflower, colza), spices (cinnamon, cloves, ginger, nutmeg, saffron, turmeric, and others), natural gums and resins, vegetable saps and extracts, and other extracts and concentrates.7 This creates new opportunities for US companies that export these products to have more predictable and reliable supply chains to sell to China’s growing market.
Tariffs on US imports of Chinese goods, and retaliatory tariffs imposed by the China government on imports of US goods, remain largely in place, even though the two countries reached the Phase One Agreement. This includes 25% tariffs on US imports of certain essential oils, fish oils, numerous acids, salts, and compounds from China classified under the US Harmonized Tariff Schedule Chapter 29 (Organic Chemical).8 Likewise, US companies that export dietary supplements to China face various retaliatory tariffs. In response to US tariffs, China has placed tariffs ranging from 5%-25% on thousands of US products, including animal and fish oils; certain extracts; various chemicals used in vitamins, food, and medicine; medicinal capsules; and plants used in medicines.9 The extent to which the US industry relies on raw materials from China has been a source of concern for US companies. For example, the Natural Product Association testified at a June 2019 hearing held by the Office of the US Trade Representative to address challenges faced by small- and medium-sized US companies that source from China.10 On the whole, the tariffs remain in place at this time, even though several companies have sought and received product-specific exclusions from them.11
The duration of these tariffs remains uncertain. During negotiations for the Phase One Agreement, Chinese officials lobbied to have US duties on Chinese imports lifted, but the US agreed to reduce tariffs on a specific tranche of goods only.12 Negotiations for a phase two agreement were expected to continue immediately after the Phase One Agreement was signed, but the COVID-19 pandemic has caused a significant delay in talks until further notice. A phase two agreement is expected to cover a range of issues, including the Chinese government’s provision of subsidies to domestic industries, intellectual property violations and enforcement of those violations, and forced technology transfer as a condition for access to China’s market.
Tariffs on imports from the EU
A separate set of tariffs, stemming from the long-standing World Trade Organization (WTO) dispute between the US and the EU, affects US companies doing business in an EU member country. The dispute stems from the EU’s provision of subsidies to aircraft manufacturer Airbus and has, for years, been the source of tariffs on US goods imported into the EU and EU goods imported into the US.
Most recently, the US issued a new set of tariffs on EU imports after a WTO panel determined in October 2019 that the US was entitled to impose countermeasures against the EU for subsidies provided to Airbus.13 Although the WTO panel determined that the Airbus subsidies caused lost sales and revenues to the US aircraft industry, its ruling does not limit the US to imposing countermeasures (e.g., tariffs) to any particular industry or product. In previous years, the US has imposed duties on EU imports on a rotating, or so-called “carrousel,” basis, whereby products were subject to duties for a certain period and then removed from the tariff list. In April 2019, the US proposed applying additional duties to a range of EU imports, including various essential oils (orange, lemon, grapefruit, peppermint, eucalyptus, and others), concentrates of essential oils, and resinoids.14 Ultimately, and after much input from the industry ‒including comments submitted by the Council for Responsible Nutrition explaining that many US companies source key raw ingredients from the EU15 ‒ none of those items were included on the final list of Section 301 duties for EU imports that is currently in effect.16 The duties went into effect on 18 October 2019, and will remain in effect until further notice.17
Country of origin and marking issues for imports
As companies evaluate their supply chains in the midst of this new trade landscape, one option available to any US company is to confirm the country of origin of products it imports from overseas. US Customs and Border Protection (CBP) is experiencing an enormous uptick in requests for country-of-origin rulings from US companies. For decades, companies have requested country-of-origin determinations for imported products made of component parts from various countries or processed in a third country before entering the US. The country of origin of an imported product is more relevant than ever today because of the varying tariff levels that apply to imports depending on product and country. Since the Section 301 duties applicable to most Chinese imports went into effect in 2018, CBP has issued hundreds of country-of-origin rulings to advise companies whether their imported products are subject to tariffs. The correct classification of imports is crucial to businesses for financial and liability purposes.
For example, if fish oil capsules are made of fish oil that is sourced and processed in Peru and is then shipped to China, where the fish oil is placed in capsules, should those fish oil capsules be labeled as a product of Peru or China when they are imported to the US? CBP answered that question in August 2019 and determined that the fish oil capsules should be marked with Peru as the country of origin.18 In its ruling, CBP explained that the fish oil retains its chemical and physical properties throughout the production process and is merely put into the capsules for dosage in China. For that reason, no “substantial transformation” of the fish oil occurs in China, and Peru remains the country of origin of the final product. CBP has confirmed in other rulings that the country from which the fish oil is sourced is the country of origin for fish oil capsules, even if the encapsulation process occurs in a third country before the product is imported into the US.19
CBP has concluded that a “substantial transformation” occurs in cases where the processing performed in a third country, or in the US prior to sale, is more involved or complicated. For example, in 2018, CBP considered the country of origin for three different multivitamins.20 In 2018, CBP considered the country of origin for three different multivitamins.20 The multivitamins contained raw material ingredients from numerous countries, including China, India, Spain, Malaysia, Brazil, and the US. The raw materials were all imported into the US, where they were processed into multivitamins at a production facility in Michigan. CBP found that the combining and mixing of the raw materials in the US was substantial because each of the raw materials loses its original identity when combined to create a new finished product, the multivitamins. The multivitamins were, therefore, a product of the US. In another 2019 ruling, however, CBP found that a vitamin product whose active ingredient was sourced in Switzerland, imported to India to be mixed with inactive ingredients, then imported into the US, had Switzerland as the country of origin.21 CBP continues to process hundreds of country-of-origin requests as companies evaluate how to optimize the competitiveness of their production process and supply chain given the current trade climate.
Where does this leave US companies? The industry has been vocal about the impact of current trade policies on dietary supplement companies. The dust has settled in certain respects, in that companies understand the impact of tariffs that have now been in place for a couple of years, but there are likely to be further changes ahead. Once the US emerges from dealing with the COVID-19 pandemic, companies can expect trade to return to being a top priority. US-China trade negotiations will continue, the United States-Mexico-Canada Agreement will be implemented, and new trade agreements will be negotiated – all of which will require successful companies to understand the applicable rules and how to structure their operations within those rules to maximize the ability to compete.
CBP, Customs and Border Protection; EU, European Union; HTS, harmonized tariff schedule; USTR, US Trade Representative; WTO, World Trade Organization.
  1. Office of the United States Trade Representative. 2020 trade policy agenda and 2019 annual report of the president of the United States on the trade agreements program (p. 1). https://ustr.gov/sites/default/files/2020_Trade_Policy_Agenda_and_2019_Annual_Report.pdf. February 2020. Accessed 9 June 2010.
  2. Ibid, pp. 1-2.
  3. Office of the United States Trade Representative. Economic and trade agreement between the government of the United States of America and the government of the People’s Republic of China. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf . Signed 15 January 2020. Accessed 9 June 2020.
  4. Op cit, 1. 2020 trade policy agenda, p. 5.
  5. Steinford S. Trade war raises industry’s China conundrum . . . again. Whole Foods Magazine. https://wholefoodsmagazine.com/columns/tracking-transparency/trade-war-raises-industrys-china-conundrumagain/. Published 15 July 2019. Accessed 8 April 2020.
  6. Op cit, 3. US-China Phase One Agreement, ch. 3.
  7. Op cit, 3. US-China Phase One Agreement, Annex 6.1 and attachment to Annex 6.1.
  8. See Notice of Modification of Action, 83 Fed. Reg. 47,974 (US Trade Rep. Sept. 21, 2018), https://ustr.gov/sites/default/files/enforcement/301Investigations/83%20FR%2047974.pdf (accessed 15 June 2020), as amended by Notice of Modification and Amendment of Action, 83 Fed. Reg. 49,153 (US Trade Rep. Sept. 28, 2018), https://ustr.gov/sites/default/files/enforcement/301Investigations/2018-21303.pdf (accessed 15 June 2020).
  9. Reuters. Factbox: Next rounds of Trump’s tariffs on Chinese goods to hit consumer. https://www.reuters.com/article/us-usa-trade-tariffs-factbox/factbox-next-rounds-of-trumps-tariffs-on-chinese-goods-to-hit-consumers-idUSKCN1VL0EX. Published 31 August 2019. Accessed 27 April 2020.
  10. Office of the United States Trade Representative. USTR 301 Committee: Section 301 Tariffs Public Hearing [Transcript, testimony of Daniel Fabricant].  https://ustr.gov/sites/default/files/enforcement/301Investigations/Section_301_Hearing_Transcript_on_Proposed_Tariffs_Day_4.pdf. Date of hearing, 20 June 2019. Accessed 13 April 2020.
  11. Office of the United States Trade Representative. $200 billion trade action (List 3) . https://ustr.gov/issue-areas/enforcement/section-301-investigations/section-301-china/200-billion-trade-action. Notice of action 4 October 2019.  Accessed 10 June 2020.
  12. Office of the United States Trade Representative. United States and China reach phase one trade agreement [press release]. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/december/united-states-and-china-reach. Released 13 December 2020. Accessed 10 June 2020.
  13. Office of the United States Trade Representative. US wins $7.5 billion award in Airbus subsidies case [press release]. Released 2 October 2019. Accessed 10 June 2020.
  14. Initiation of Investigation; Notice of Hearing and Request for Public Comments: Enforcement of U.S. WTO Rights in Large Civil Aircraft Dispute, 84 Fed. Reg. 15,028 (US Trade Rep. Apr. 12, 2019). https://www.govinfo.gov/content/pkg/FR-2019-04-12/pdf/2019-07267.pdf. Dated 12 April 2019. Accessed 15 June 2020.
  15. Council for Responsible Nutrition. Comments on USTR’s Notice of Determination and Action Pursuant to Section 301: Enforcement of U.S. WTO Rights in Large Civil Aircraft Dispute. https://www.crnusa.org/sites/default/files/pdfs/comments-pdfs/2020-02-11%20CRN%20Comments%20on%20USTR-%20US-EU%20Tariffs%20-%20FINAL.doc.pdf. Dated 11 February 2020. Accessed 10 June 2020.
  16. Office of the United States Trade Representative. Notice of determination and action pursuant to Section 301: Enforcement of US WTO rights in large civil aircraft dispute [document citation,  84 FR 54245. https://www.federalregister.gov/documents/2019/10/09/2019-22056/notice-of-determination-and-action-pursuant-to-section-301-enforcement-of-us-wto-rights-in-large. Published 9 October 2019. Accessed 10 June 2020.
  17. Ibid.
  18. U.S Customs and Border Protection Ruling HQ303093, “Country of Origin Marking; Encapsulated Fish Oil” (Aug. 28, 2019) (revoking prior ruling N287514). https://rulings.cbp.gov/search?term=Country%20of%20Origin%20Marking;%20Encapsulated%20Fish%20Oil&collection=ALL&sortBy=RELEVANCE&pageSize=30&page=1.  Accessed 15 June 2020.
  19. U.S. Customs and Border Protection Ruling N307553, “The Tariff Classification and Country of Origin of Fish Oil Dietary Supplements from Peru and Iceland” (Nov. 22, 2019). https://rulings.cbp.gov/search?term=N307553&collection=ALL&sortBy=RELEVANCE&pageSize=30&page=1.  Accessed 15 June 2020.
  20. U.S. Customs and Border Protection Ruling H299717, “U.S. Government Procurement; Country of Origin of Advanced 2 Multiple Vitamin and Mineral Dietary Supplement Tablets; Substantial Transformation” (Aug. 27, 2018). https://rulings.cbp.gov/search?term=H299717&collection=ALL&sortBy=RELEVANCE&pageSize=30&page=1.  Accessed June 15 2020.
  21. U.S. Customs and Border Protection Ruling N305364, “The Tariff Classification and Country of Origin of Phytonadione Injectible Emulsion 10 mg/mL in Dosage Form, from Switzerland” (Aug. 13, 2019).  https://rulings.cbp.gov/search?term=N305364&collection=ALL&sortBy=RELEVANCE&pageSize=30&page=1. Accessed 15 June 2020.
About the authors
Kristi Wolff, JD, is a partner in the advertising law practice group at Kelley Drye & Warren in Washington, DC. Her practice focuses on food, drugs, dietary supplements, medical devices, personal care, and consumer health products. Wolff graduated from Concordia College and from University of Wisconsin Law School, where she was a member of the editorial board of the Wisconsin Women’s Law Journal.  She can be contacted at kwolff@kelleydrye.com.
Melissa Brewer, JD, is a senior associate in the international trade practice group at Kelley Drye & Warren in Washington, DC. Her practice focuses on international trade and customs matters, including trade remedy investigations and litigation stemming from US agency trade determinations. Brewer graduated from Franklin & Marshall College and from the Catholic University of America, Columbus School of Law, where she specialized in International Trade Law. She can be contacted at mbrewer@kelleydrye.com.

Citation Wolff K, Brewer M. Trade update for the dietary and nutritional supplement industry. June 2020. Regulatory Focus. Regulatory Affairs Professionals Society.

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