Episode Transcript
[00:00:00] Foreign.
[00:00:06] And welcome to our podcast series A and M Tax Tax Policy Updates where we bring you insights into the latest developments in global tax policy and the controversy space.
[00:00:20] With you today is Andy Winthrop and I drive our global trade and indirect tax solutions across APAC based out of Hong Kong.
[00:00:29] In today's episode, aptly named Tariffs Tangles and the Hong Kong Advantage, I'm here to untangle the spaghetti bowl of global trade policies because let's face it, international trade right now feels less like a neat supply chain and more like a supply maze.
[00:00:51] Today we're diving into how recent US Trade policies under President Trump have shaken up global customs environments and how Asian governments are responding and why Hong Kong, the tiny but mighty city, might just be the secret weapon in optimizing supply chains.
[00:01:12] So what's been happening?
[00:01:15] As we all are aware, the US has rolled out tariffs on a wide range of countries, industries and products, expanding the tariff mandate of Trump 1.0, which was particularly focused on China.
[00:01:31] The idea here is to protect American industry, but the ripple effects have been global.
[00:01:38] Governments across Asia Pacific have had to rethink their strategies.
[00:01:43] For example, China has doubled down on export controls, particularly for rare earths, and has commenced diversifying export markets away from the U.S.
[00:01:55] vietnam and Malaysia have become darlings of supply chain relocation while also entering into trade agreements with the US As a means to manage any tariff impact.
[00:02:07] Countries like Japan and South Korea have also entered trade agreements with the U.S.
[00:02:15] but these markets are leaning into regional trade agreements for further resilience.
[00:02:20] And regional free trade agreements is something that we'll touch on a little later.
[00:02:26] But what about Hong Kong?
[00:02:29] Hong Kong isn't trying to out manufacture anyone.
[00:02:33] Instead it's playing the role of clever middleman, the logistics wizard who knows how to get your goods from A to B.
[00:02:41] And here's why Hong Kong matters.
[00:02:44] It's a free port with minimal tariffs, a trusted legal system and some of the best logistics infrastructure in the world.
[00:02:52] When tariffs first hit Chinese goods in 2018, companies started asking how do we keep supply chains efficient without bleeding cash?
[00:03:04] Often, Hong Kong became the answer.
[00:03:07] It's not just a port, it's a problem solver.
[00:03:12] Businesses use Hong Kong to transact smarter. For example, using Hong Kong in transaction models that apply the first sale for export regime.
[00:03:24] They leverage local customs expertise, navigating understandings about rules of origin.
[00:03:32] They tap into financial services, linking up with trade financing and currency hedging.
[00:03:39] And of course, Hong Kong is used to consolidate shipments through one of the busiest ports and airports globally.
[00:03:47] So think of Hong Kong as the supply chain. Swiss army knife. Compact, versatile and surprisingly sharp.
[00:03:55] So let's talk about the first sale for export scheme and how companies are using Hong Kong as part of their transaction models to benefit from this arrangement.
[00:04:06] This is a customs valuation strategy where duties are calculated based on the first sale in a multi tiered transaction, say between a manufacturer and a middleman, rather than the final sale price to the importer.
[00:04:20] And here's how Hong Kong comes in.
[00:04:23] Many companies structure their supply chains so that the first sale occurs through a Hong Kong entity.
[00:04:32] By doing this, they can declare a lower dutiable value when exporting to the US Effectively reducing tariff exposure.
[00:04:42] Take the apparel industry.
[00:04:43] A US Retailer sources garments from factories in the mainland China.
[00:04:48] Instead of shipping directly, they route the transaction through a Hong Kong trading company.
[00:04:53] The first sale price, in other words, the price between the manufacturer and the Hong Kong trading company is lower than the final price to the US Buyer.
[00:05:04] Customs duties are then calculated on that lower value.
[00:05:08] The result?
[00:05:09] Lower duties, leaner costs and a more competitive edge.
[00:05:14] And because Hong Kong has the legal and financial infrastructure to handle these transactions cleanly, companies can also doing this without reason, without raising red flags, as long as they adhere to the first sale for export rules.
[00:05:29] It's a perfect example of how Hong Kong isn't just a port, it's a strategic chess piece in a global trade game.
[00:05:38] Now let's zoom out beyond Hong Kong. Regional free trade agreements are reshaping consumption patterns across Asia Pacific.
[00:05:48] The Regional Comprehensive Economic Partnership, or rcep, for instance, links multiple economies into the world's largest trading block. And what does this mean in practice, companies can redistribute production and consumption across APAC in a cost effective way.
[00:06:08] For example, a Japanese electronics firm might shift assembly to Vietnam to benefit from lower tariffs. Under rcep, a Korean automotive exporter can tap into tariff free access to ASEAN markets, redirecting goods that might otherwise face US duties.
[00:06:28] Even Chinese firms are using FTAs to reroute supply chains, ensuring goods reach their consumers, especially in Southeast Asia, at competitive prices.
[00:06:40] In fact, the RCEP is the first trade agreement to bring together Japan, Korea and China.
[00:06:50] In short, FTAs are acting like pressure valves, relieving the strain of US tariffs by opening up new cost efficient consumption channels within the APAC region and for consumers. It means your smartphone might be assembled in Vietnam, shipped through Singapore, and still arrive in markets such as local Los Angeles faster than your Amazon package of socks.
[00:07:16] So what's the big takeaway?
[00:07:18] U.S. trade policies under President Trump have disrupted the global order, but have also sparked innovation.
[00:07:26] Asian economies are adapting in different ways, and Hong Kong is proving that agility, connectivity, and a little cleverness can turn challenges into opportunities.
[00:07:38] In this environment, it's important to keep your trade routes open, your customs paperwork tidy. And remember, in global trade, it's not just about where you make things, it's about how you move them.
[00:07:52] Thank you for joining us today.
[00:07:55] Stay with us as we continue this journey in our upcoming podcasts. Please also check out our monthly newsletter, which will bring you the latest key updates around selected editorial pieces from our Global Tax Network.
[00:08:08] And don't forget to follow this channel. There'll be regular insights and updates throughout the podcast coming your way. Thanks again.
