Beauty products caught in an ugly trade war

In the United States, the cosmetics and personal care industry accounts for nearly $23bn of gross domestic product, and supports 3.6m domestic jobs.  Cosmetics manufacturers export roughly $3bn annually to the European Union alone, much of which includes products manufactured in the United States by European-owned companies. 

In retaliation for the imposition of tariffs on imports of steel and aluminum from the European Union and Canada – imports that the Trump Administration claims threaten national security – these trading partners retaliated by vowing to seek compensation in the form of tariffs on certain products “originating in the United States.”  The European Union’s and Canada’s tariffs include cosmetic and personal care preparations.  Specifically, in the European Union, powders, eye makeup, and nail products are now subject to a 25% tariff.  In Canada, over $300m of pre-shave and aftershave, body wash, nail products, and hair lacquers are subject to a 10% tariff.

Originating in the United States ​

It is unclear exactly how the criterion “originating in the United States” is applied, but customs law principles provide that a product “originates” from a certain territory if it has been wholly manufactured or “lastly substantially transformed” in that territory.  Acts of substantial transformation typically go beyond labelling, packaging, or affixing the logo on a product.  Rather, “substantial transformation” denotes a process or operation imparting to a product certain new characteristics or properties.  For example, compounding sub-formulas or adding fragrance might qualify a product as “substantially transformed”.  Practically speaking, if the last substantial transformation occurs in production facilities within the United States, applicable tariffs will be levied upon export.

It may be tempting to view the imposition of tariffs as an opportunity for native European and Canadian manufacturers to replace sales of products originating in the United States.  It is, however, shortsighted to regard tariffs as a boon to cosmetics and personal care companies in Europe or Canada, particularly given larger companies’ global supply chain. 

Inside and outside the United States​

As a spokesperson for industry group Cosmetics Europe said, “it is important to recall that many North American brands of cosmetic and personal care products belong to European and historical companies.”​  Indeed, a Cosmetics Europe survey shows that in excess of 67% of United States’ cosmetics exports targeted benefit European Union companies, who either own the exporting brands or, to a lesser degree, outsource manufacturing.  Therefore, sanctioning imports of cosmetic products to the European Union could well have detrimental effects on European companies, including harming jobs and growth globally. 

Were companies to shift consumer focus to tariff-free European and Canadian manufactured products, the United States cosmetics and personal care industry would be negatively hit, over time weakening manufacturing and eventually costing American workers vital employment.  Particularly susceptible may be price-sensitive independent companies seeking to establish an overseas presence.     

What’s next?​

As it stands, representatives from the European Union and United States have suggested “discussing” and potentially easing steel and aluminum tariffs, though the Trump Administration has given no indication of backing down from its protectionist perch generally, and the specter of cosmetics and personal care companies caught in the middle of a protracted trade war is real.  Unfortunately, there is little to do at the moment but lobby governments both inside and outside the United States, and comply with the regulations imposing tariffs. 

The US tariffs issue is ongoing. Guest author Aliza Karetnick last updated this article on 26 July; any developments since then are not included.​

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Aliza R. Karetnick, a Partner with Duane Morris LLP, is the go-to attorney for industry clients seeking comprehensive legal advice on a host of issues, including commercial and intellectual property disputes, intellectual property protection, FDA and FTC compliance, advertising, labeling and claim substantiation, class action defense and employment issues.