directly affected by the tariff. Tariffs on water filtration and treatment products affect
approximately $85 million (70 percent) of Culligan’s sales to U.S. distributors of these products.
The estimated cost to Culligan of the tariffs is almost $10 million for HS code 8421990040,
which covers all of the water filtration system parts and components that Culligan

imports. Culligan has filed separate exclusions requests for each of those parts and components

3. The Tariff Will Have a Significant Detrimental Impact on the Small and Medium
Sized Businesses that Distribute Culligan Products

Culligan is also concerned that the tariff will have a significant detrimental impact on the
over 500 independent Culligan franchises, which operate across 49 states. These franchises are
generally small- to medium-sized enterprises that each employ on average about 10 people, and
have an average annual revenue of approximately $2 million.

We operate in an extremely competitive market. As such, both Culligan and our
independent distributors have very limited ability to bear the burden of a significant cost
increase. Culligan is still in the process of trying to figure out how to bear the costs of this tariff,
but the tariff has already forced Culligan raise some of its prices, which passes the burden of the
increased tariff on to distributors, and ultimately, U.S. consumers. Approximately 63% of
Culligan distributors’ sales would be affected by the tariff on drinking water filtration systems.
In our May 11, 2018 written submission to the Section 301 Committee we attached comment
letters from 186 of our independent Culligan distributors, expressing their concern over the tariff
on Culligan products. We submitted an additional 45 letters from independent Culligan
distributors with our May 22 post-hearing submission. We are resubmitting these 231 letters
with this request (see Attachment B).

If Culligan passed on the 25% tariff increase in the form of a price markup to its
independent distributors, the distributors would see an overall cost increase. If franchises
absorbed that price increase, or if Culligan’s ability to supply products to its independent
distributors were disrupted, franchises likely would be forced to reduce significantly the number
of people they employ. For example, if distributors experienced a 10-15% reduction in their
workforce due to cost increases, approximately 500-750 jobs across Culligan’s network of
distributors would be lost.

4. The Tariff Will Have a Significant Detrimental Impact on Our Subsidiary That
Exports Parts from the United States to China

Our subsidiary, Paragon, is also negatively affected by the tariff on drinking water
filtration systems. Paragon is a U.S. company based in Clearwater, Florida. The Paragon facility
in Florida manufactures and exports carbon blocks to China for incorporation in its drinking
water filtration products, which are then imported back into the United States. The tariff will
depress significantly demand for carbon block, forcing Paragon to reduce its U.S. workforce.

The tariff also could force Paragon to shut down the operation of several crucial product
lines, including refrigerator filters. Paragon’s refrigerator filter line is currently the fastest
growing area of Paragon’s business, and is expected to make up over 20% of Paragon’s sales in


Drinking water filtration systems help consumers protect themselves against
contaminants in their drinking water, such as lead, chromium-6, nitrate, perchlorate, and arsenic.
Today, individuals and whole communities depend on point-of-use and/or point-of-entry water
filtration and purifying treatment technologies to protect public health. For example, last year,
pollutants were found in the water supply in Plainfield Charter Township, a community outside
of Grand Rapids, Michigan. For decades, a local shoemaking company, Wolverine Worldwide,
the maker of popular footwear brands like Hush Puppies and Merrell, had been dumping waste
from its tannery into the woods and surrounding area, causing the water crisis. Following the
discovery of pollutants in the local water supply, contractors showed up to test nearby residents’
wells, many of which were also tainted. Culligan water filtration and treatment products were
installed in thousands of homes in the area in order to address the problem.

The risk of water contamination continues to be a real concern in communities across the
United States. In lead tests conducted by utilities at the end of 2017, 1,124 community water
systems, serving 1.8 million Americans in 45 states, exceeded the U.S. EPA action level for lead.
A U.S. Government Accountability Office report found more than 40 percent of the nation’s
school districts, serving 35 million students, failed to test for lead in 2016. Of the districts that
tested, 37 percent reported lead levels above the threshold the districts set for taking remediation.
Lead is not the only dangerous pollutant in our water supply. In 2015, the EPA reported water
supplies for over half a million Americans over 32 states exceeded the agency’s maximum
contaminant level for arsenic. In 2016, a National Cancer Institute study found elevated levels of
bladder cancer in New England where arsenic was found in drinking water from private wells.
And from 2010 to 2015, 158 public water systems serving 276,000 Americans in 27 states
reported radium levels exceeding the EPA maximum contaminant level for combined radium-
226 and radium-228.

A tariff on drinking water filtration systems threatens to make it less affordable for
consumers to protect themselves from these pollutants and during water contamination events
like those in Plainfield Charter Township and Flint, Michigan. That is, if Culligan were to
increase the price of products sold to its distributors, the distributors likely would have to pass on
some or all of these costs to consumers. In the drinking water filtration systems market, a 25%
price increase corresponds to an increase to consumers of around $250 per unit, on average. As
mentioned above, Culligan products reach over 2 million homes and small businesses across the
United States. Any increase in the price of Culligan products thus would have a significant
consumer impact, and would make it more difficult for consumers to respond to contamination
events and protect themselves from dangerous pollutants. Please find following this request a fact
sheet prepared by the Water Quality Association on the harmful effects of pollutants in our water
supply (see Attachment A).

2. The Tariff Causes Severe Economic Harm to Culligan
Increased tariffs on imports of the drinking water filtration systems described above have

a severe impact on Culligan’s U.S. operations. Culligan has imported drinking water filtration
systems from China since 2006, and Culligan’s imported drinking water filtration systems are

? Mitch Smith, Miles from Flint, Residents Turn Off Taps in New Water Crisis, NY Times (Nov. 24, 2017),
https://www.nytimes.com/2017/11/24/us/michigan-water-wolverine-contamination.htm].

4


the coming years. However, given the competitive nature of the industry, the tariff and resulting
cost increases may prevent Paragon from competing in this market in the future.

5. The Tariff Puts Culligan and Its Distributors at a Competitive Disadvantage with
Respect to Our Major Chinese Competitor

A tariff increase on our consumer water filtration and treatment products puts both
Culligan and Paragon at a disadvantage with respect to our competitors. For example, one of
Culligan’s competitors is Haier, a Chinese-owned company whose U.S. affiliate also imports
drinking water filtration systems into the United States. Our understanding is that Haier does not
source these systems from China but from Kemflo, a Taiwanese company, Microfilter, a South
Korean company, and from Paragon, our U.S.-based subsidiary. As Paragon is affected by the
tariff increase, Haier could decide to source product exclusively from Taiwan and South Korea,
which are not subject to the 25 percent tariff. In this way, the tariff will have the perverse effect
of benefiting a Chinese company, Haier, by tilting the playing field against two U.S. companies,
Culligan and Paragon, which face higher costs, lost sales, and lower market share.

6. The Tariff Will Not Advance USTR’s Objectives in Addressing China’s Technology
Transfer and Innovation Policies

The tariff on drinking water filtration systems does not advance USTR’s objectives in
addressing China’s technology transfer and innovation policies and removing the market access
barriers identified by the Section 301 investigation. There is no evidence that China imposes
restrictions on foreign ownership, forces technology transfer, or requires licensing of technology
on non-market based terms in our consumer-based sector. Moreover, consumer water filtration
and treatment products are low-tech products that do not fall within the categories of products
and sectors that benefit from China’s unfair policies as identified by the 301 investigation. A
tariff on consumer drinking water filtration systems thus does not meet the stated policy goal of
the Administration to impose tariffs on China in a way that “‘address[es] the acts, policies, and
practices of China that are unreasonable or discriminatory and that burden or restrict U.S.
commerce.”?

7. Conclusion

In sum, increased tariffs on consumer water filtration products will have serious health
effects and a detrimental impact on U.S. consumers; significantly harm Culligan’s U.S.
operations; damage small and medium sized businesses; harm a Culligan affiliate that exports
parts to China; and will place Culligan and its distributors at a competitive disadvantage with
respect to a major Chinese competitor. Furthermore, the tariffs do not advance USTR’s
objective of targeting products that benefit from the unfair policies and market access barriers
identified by the Section 301 investigation.

For these reasons, Culligan urges USTR to exclude from the tariff:

> Presidential Memorandum on the Actions by the United States Related to the Section 301 Investigation (Mar. 22,
2018), https://www. whitehouse. gov/presidential-actions/presidential-memorandum-actions-united-states-related-
section-301-investigation/.


Q 00 ao 9399 W. HIGGINS ROAD

Culligan International Company
Section 301 Exclusion Request
HS 8421210000, Drinking Water Filtration Systems
September 17, 2018

Overview of Request:

Culligan International Company (“Culligan”) is a U.S. company, founded in 1936, that
specializes in the manufacture and distribution of water filtration and treatment systems for
residential, office, commercial, and industrial applications. Culligan is headquartered in
Rosemont, Illinois, and directly employs more than 800 people in the United States to produce,
market, and sell its water filtration and treatment products. Culligan also works with over 500
U.S. distributors, and today, Culligan provides affordable, high-quality products to over 2
million homes and small businesses across the United States.

Drinking water filtration systems help consumers protect themselves against
contaminants in their drinking water. As discussed in greater detail below, a tariff on drinking
water filtration systems threatens to make it less affordable for consumers to protect themselves
from these pollutants and during water contamination events.

In the short term, Culligan cannot source its products from manufacturers outside China.
Any new supplier would have to go through a lengthy certification process to ensure that its
products meet health and safety standards. In addition, Culligan’s subsidiary, Paragon Water
(“Paragon”), owns a manufacturing facility in China, which cannot easily be relocated. For these
reasons, we estimate that it will take us approximately 18-36 months to shift our supply lines out
of China. In the meantime, there will be a severe and immediate impact on U.S. consumers and
our U.S. operations.

Culligan respectfully requests that USTR exclude consumer drinking water filtration
systems (covered by HS code 8421210000) from the list of imports from China subject to an
additional 25 percent duty.' That is, in order to limit the consumer impact and minimize
potential job loss to the over 500 small and medium enterprises that make up Culligan’s
association of independent dealers, we request that USTR exclude from the tariff:

Drinking water filtration systems containing 1-4 filter cartridges connected by a manifold, a
separate polishing filter, a storage tank with a diameter of 9.0-15.5 inches, and a faucet, to be
installed under sinks and suitable for household use.

' Notice of Determination and Request for Public Comment Concerning Proposed Determination of Action Pursuant
to Section 301: China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and
Innovation, 83 Fed. Reg. 14,096 (Apr. 6, 2018), https://www.gpo.gov/fdsys/pkg/FR-20 18-04-06/pdf/2018-
07119.pdf.


Drinking water filtration systems containing 1-4 filter cartridges connected by a manifold, a
separate polishing filter, a storage tank with a diameter of 9.0-15.5 inches, and a faucet, to be
installed under sinks and suitable for household use.

eek

I certify that the information provided in this submission is complete and correct to the
best of my knowledge.

Respectfully,

Judd Larned


Such an exclusion from the tariff would be easy for U.S. Customs and Border Protection
to administer, and would exclude only a portion of imports from China under this tariff line.
This approach also would be consistent with USTR’s stated goal of minimizing the impact of
tariffs on consumers and small businesses.

Question 2: Description of Product of Concern — Drinking Water Filtration Systems
We request that USTR exclude from the tariff:

Drinking water filtration systems containing 1-4 filter cartridges connected by a manifold, a
separate polishing filter, a storage tank with a diameter of 9.0-15.5 inches, and a faucet, to be
installed under sinks and suitable for household use.

This system employs reverse osmosis filtration to remove chlorine, volatile organic compounds,
lead, and particles from water. The faucet is mounted on the kitchen sink to disperse the filtered

water.

Photos and a diagram of the product of concern are below:

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Questions 8 and 9: Culligan Has No Good Alternative Sources of Water Filtration Products

In the short term, Culligan cannot source its products from manufacturers outside China.
First, any new supplier of these products will have to go through the requisite certification
process to ensure that these water filtration and treatment products, the majority of which are
intended for use in households and small businesses, meet the proper health and safety standards
for installation in U.S. homes. Between the certification process and the transfer of production to
a new country, we estimate that it will take us around 18-36 months to shift our supply lines out
of China. In the meantime, there will be a severe and immediate impact on U.S. consumers and
our U.S. operations.

Second, even if our drinking water filtration systems can be sourced from another
country, products may not be available at a similar price or under similar terms. Other suppliers
may already be operating at capacity and could need to significantly adjust their operations in
order to take on our business. Moreover, it is not clear that existing sources of these products
outside of China are capable of meeting our company’s needs or U.S. demand. Any increase in
the price of Culligan products, caused either by the direct burden of the tariff or costs incurred in
disrupting our supply chain, would make our products less affordable and would make it more
difficult for consumers to protect themselves from dangerous pollutants.

As discussed in further detail below, Culligan’s U.S. subsidiary, Paragon, manufactures
carbon blocks in Florida and exports them to China for incorporation in its water filtration
products, which are then imported back into the United States. Paragon owns and operates its
own manufacturing facility in China, and it would be extremely difficult for Paragon to shift its
operations out of China. The burden of moving the supply chain out of China involves more
than forming new relationships and undertaking the relevant certification process. Paragon will
have to shift its own facilities to an alternative country, which could take several years and
involve significant costs.

Question 10: Culligan Import Data for Drinking Water Filtration Systems

Year Value Quantity
2017 $16,351,544 1,113,339
2016 $16,159,710 960,715
2015 $ 22,012,642 1,061,625

Question 11: Additional Information

1. The Tariff Will Reduce Access to Water Filtration Products that Are Vitally
Important to Public Health

Culligan’s drinking water filtration systems help ensure access to clean, healthy drinking
water in homes, and also serve a vital public health purpose, particularly as issues with the local
municipal water supply arise with greater frequency as U.S. infrastructure ages.