The Opportunities and Risks in Tariff Engineering and Other Reduction Strategies

As fluctuating tariffs become the new norm, learn how tariff engineering and other reduction strategies might benefit your company.

After years of conducting foreign trade in a stable environment, the U.S. government’s recent changes in trade policy represent uncharted territory for many U.S. companies. As a result, trade with suppliers, especially those in China where tariffs on some 2,000 products jumped from the 2 to 3 percent level to upwards of 25 percent, has become particularly challenging.

It’s useful to seek ways to mitigate the impact of higher input costs on your bottom line, and there are limited options to consider for obtaining tariff relief. Knowing what you can do legally and how to protect yourself against unscrupulous suppliers offering tariff reduction strategies can be essential to successfully navigating this new era of fluctuating tariffs.

Opportunities for Tariff Relief

Among appropriate means of gaining relief from increased tariffs is re-sourcing your inputs. While this is time-consuming, switching to suppliers of similar goods in lower-tariff countries, or even to domestic suppliers, could be a worthwhile exercise.

Another option is to engage in permitted tariff engineering. This involves changing product designs to produce a favorable classification in the Harmonized Tariff Schedule of the United States (HTSUS). The HTSUS is a federal statute containing some 18,927 entries. Each entry is a code for merchandise that provides the corresponding rate of duty.

For instance, a clothing manufacturer might find that a small adjustment in the fiber content of its raincoats could drastically reduce the cost of importing while preserving the quality and design. Ford Motor Company, among others, has successfully managed its tariff expenses for years by carefully managing the design of products it imports.

Challenging the HTSUS codes and requesting exclusions is another option. While importers do not need permission from Customs to change the tariff codes the importers assign to merchandise, given the high profile of the new tariffs, importers should be cautious. There is a formal process of requesting a binding classification ruling from U.S. Customs and Border Protection and another for challenging a classification applied by Customs. The government has also permitted importers of steel and aluminum products and of goods from China that are subject to additional duties to request an exception. This involves submitting requests to the Department of Commerce (DOC) or the Office of the U.S. Trade Representative. But it involves preparing petitions, submitting arguments, and time. Decisions may not come quickly.

Relocating facilities to a free trade zone (FTZ) can eliminate tariffs altogether. FTZs are defined geographic areas spread across the country where goods may be stored, handled or assembled, and re-exported without incurring tariffs. For a current list of locations, check the Department of Commerce’s website. If goods subject to additional duties are eventually entered into the commerce of the United States, duties may be due at that time.

Using bonded warehouses is another option. This involves taking delivery of goods subject to increased tariffs and storing them for up to five years. After this storage period, the goods can be exported directly from the warehouse or released into the U.S. market after the associated tariffs have lapsed or an exclusion requested from DOC is granted. Like FTZ, goods withdrawn from a bonded warehouse that enter the commerce of the United States may be subject to duty at that time.

What to Be Wary Of

While the above opportunities can mitigate the added expense of tariffs, there are several activities you should avoid, along with the firms and individuals who may suggest them to you or engage in them without your knowledge. Among the most common are foreign suppliers who offer to alter the HTSUS codes on their products, or relabel goods to make them appear as if they come from a low-tariff country. Both activities are illegal.

Some foreign exporters and logistics companies are advertising tariff reduction strategies. These strategies involve rerouting shipments—also known as transshipping—through low-tariff ports to make it appear that they are not coming from China at all, but from Malaysia, Vietnam, Indonesia or another Southeast Asian country. While re-routing is not automatically illegal in the U.S., changing or disguising the country of origin of a shipment is.

The greatest risk you may face, however, is from exporters who simply change codes without your knowledge or misrepresent the location of their factories. The U.S. government expects you to do your due diligence and verify where your goods are coming from and that they are properly coded.

The penalties for knowingly reporting an incorrect country of origin to Customs can equal the value of the shipment in question. And, if false statements are intentionally made to the government, criminal penalties may also be assessed.

Where the misreporting is due to negligence—not executing care in performing due diligence and reporting information to Customs—the penalty can range up to twice the amount of the underpayment. However, if there was reason for you to be suspicious, and you ignored the signs of incorrect information rather than just missing them, the associated penalty may be as much as four times the underpayment.

If Customs has reason to be concerned about a shipment or happens to inspect it and finds an issue, it can seize your goods. In addition, inquiries may arise well after the goods are received and sold. In such cases, importers are assessed civil penalties or “liquidated damages” depending on the violation.

Trust but Verify

To help protect yourself, here are some actions to consider taking prior to placing orders with new vendors. These actions go beyond simply conducting a Google search to verify that a supplier is located where they say they are:

  • Check the Internet for satellite imagery of the factory or engage someone to confirm and document that it exists.
  • Visit the production facility or have a trusted agent do it for you.
  • Ask to view records showing that the supplier has the machinery and personnel necessary to manufacture your goods.
  • Require proof of payment and receipt of the raw materials used in your goods and evidence that shipping is being made directly from that facility to you.
  • Contact local authorities to verify that the producer of your goods is a registered business.
  • Crosscheck the HTSUS codes associated with your shipment.
  • Verify the trade route before agreeing to it.

To lessen their risks, some U.S. importers are purchasing based on “delivered duty paid” terms. This is intended to make the seller responsible for compliance. Unfortunately, the strategy may not prevent liability. U.S. Customs has increasingly shown signs of treating the arrangement with suspicion.

Stay Informed

At a time when companies of all sizes view global opportunities as the key to their future growth, the recent shifts in the trade environment give rise to added risks and costs in conducting business overseas. Know that your international trade specialists are here to keep you updated. They’ll work with you as you determine your best strategies for dealing with the evolving tariff environment in the most constructive way for your business.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.