Volvo Cars and EV startup Polestar will be tapping into an old U.S. trade program to import Chinese vehicles at a lower cost, giving the Swedish brands a competitive leg up.
By using the U.S. Duty Drawback program, the Geely-affiliated automakers can recoup import duties and the 25 percent U.S. tariff assessed on the Chinese-made Volvo EX30 crossover and Polestar 2 sedan against exports of the U.S.-made Volvo EX90 and Polestar 3 crossovers, sources familiar with the matter told Automotive News.
The Duty Drawback program allows businesses to claim a refund on duties and U.S. tariffs on imports from China when offset by certain exports in the same tariff classification, said Jedd Lancaster, sales manager with customs broker Alliance Drawback Services.
“Drawback is a little-known tariff mitigation strategy,” Lancaster said. “It’s very niche within trade compliance.”
Automakers with U.S. manufacturing that create export opportunities can recoup import duties paid on vehicles in the past five years, Lancaster said.
“That can result in tens of millions of dollars returning to the company’s bottom line,” he said.
General Motors, the only other major automaker that imports vehicles made in China to the U.S., also uses the drawback program to recoup “a small portion” of duties and tariffs paid on the Buick Envision crossover, a company spokesperson confirmed.
Polestar CEO Thomas Ingenlath and Volvo COO Björn Annwall alluded to the trade plan to sell the EX30 and Polestar 2 in the U.S. competitively earlier this year. Speaking to Automotive News in April, Ingenlath said the automaker could offset import tariffs on Chinese-made vehicles with Polestar exports from Charleston.
“The cars that we produce [in South Carolina] that we export help us to import the cars that we don’t produce here,” Ingenlath said. “It is impossible to build each and every model that you have in your portfolio … in each and every region” they are sold in.
The EX30 will be the least expensive Volvo, starting at $36,145, including shipping, when it goes on sale in the first half of next year.
Asked if the sticker price includes the 25 percent China tariff, Volvo COO Annwall replied: “The prices we give you are prices for consumers. And part of the way we can handle that is that we also export cars from the U.S. — you have those kind of tariff schemes.”
A Volvo spokesman declined to discuss the automaker’s import-export strategies.
Volvo Car USA and Canada President Michael Cottone said the company “follows government rules and pays required duties on all imported vehicles as we do in all markets where we operate. “
“Since 2018, Volvo Cars, like other companies, has been subject to and pays increased tariffs on vehicles and auto components imported to the U.S. from China,” Cottone said in a statement provided to Automotive News. “This is a fundamental part of our global business equation.”
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 U.S. 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.
The Duty Drawback scheme could elevate Volvo’s 2.3-million-square-foot factory in Ridgeville, S.C., into a Southeast export hub rivaling Mercedes-Benz and BMW.
An hour north of Charleston, the Volvo assembly plant will be the global production center for the EX90 and Polestar 3 outside China.
A source said the decision to concentrate production of the two key crossovers was related to meeting North American demand and maximizing U.S. exports.
Opened less than five years ago, the Volvo plant operates at just 32 percent capacity building the low-volume S60 sedan, AutoForecast Solutions said. The forecaster estimates Volvo will crank out a combined 92,000 Polestar 3 and EX90 crossovers there in 2025.
But issues with the software development for Volvo’s new vehicle platform that underpins both new models have delayed the start of production to next year.
That could prove costly for Volvo given the retroactive nature of the Duty Drawback, AutoForecast Vice President Sam Fiorani said.
“Since Polestar 2 imports date back into 2021, exports from Charleston must start rolling out in volumes soon to offset the vehicles already on these shores and in American driveways,” Fiorani said.