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 consumer water filtration and
treatment products and their parts. 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 parts for drinking
water filtration systems, including polishing filters. 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 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
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.


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 parts for drinking water filtration systems, including polishing filters,
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 parts for drinking water filtration systems, including
polishing filters, 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 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.


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

A tariff increase on parts for 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 parts for 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 parts for 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 parts for 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/.


MONT, ILLINOIS 60018

Culligan International Company
Section 301 Exclusion Request
HS 8421990040, Polishing Filters For 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
USS. distributors, and today, Culligan provides affordable, high-quality products to over 2
million homes and small businesses across the United States.

Water filtration and treatment products help consumers protect themselves against
contaminants in their drinking water. As discussed in greater detail below, a tariff on polishing
filters, one of the key components in 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 the polishing filters used in drinking
water filtration systems (covered by HS code 8421990040) from the list of imports from China
subject to an additional 25 percent duty.! 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:

Filter cartridge for polishing filters, of plastic and designed for use in drinking water filtration
systems, 1.8-2.5 inches in diameter and 4-10 inches in length.

' 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-2018-04-06/pdf/2018-
07119.pdf.


Filter cartridge for polishing filters, of plastic and designed for use in drinking water filtration
systems, 1.8-2.5 inches in diameter and 4-10 inches in length.

oe

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 — Polishing Filters for Drinking Water
Filtration Systems

We request that USTR exclude from the tariff:

Filter cartridge for polishing filters, of plastic and designed for use in drinking water filtration
systems, 1.8-2.5 inches in diameter and 4-10 inches in length.

This cartridge is a key component of drinking water filtration systems, and houses the
polishing filter. The fully assembled drinking water system is designed for residential use, is
typically installed under the sink and employs reverse osmosis filtration to remove chlorine,
volatile organic compounds, lead, and particles from water.

Please see below both a photo and a diagram depicting the product of concern within the
overall drinking water filtration system:

nares

Polishing Filter [ 7 }


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 products 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.

Question 10: Culligan Import Data - Polishing Filters for Drinking Water Filtration
Systems

Year Value Quantity
2017 $172,769 4,642
2016 $207,127 7,973
2015 $224,479 15,103

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.

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,

itch 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.html.

3