Under the Trump administration 2.0, it is very likely that the United States will adopt a more protectionist trade policy, which will expressly include the increase in use and imposition of tariffs on imports, particularly on goods from China. Prior to this upcoming Trump presidency, the goal of G20 nations was generally inspired by notions of free trade. Absent circumvention or other bad trade behavior, the general harmonized tariff across the member nations was a mere four percent.
U.S. President Donald Trump speaks while holding a chart illustrating non-reciprocal tariff examples during a meeting in the Cabinet Room of the White House in Washington, D.C., U.S., Thursday, Jan. 24, 2019. Senators began a new effort to end the 34-day partial government shutdown after blocking two rival spending bills. The White House signaled President Trump was open to a plan to reopen agencies for three weeks, but at a price. Photographer: Alex Edelman/Bloomberg via Getty Images
We are now entering a new world of trade that will instead be defined by border taxes, including additional tariffs and duties as well as non-tariff barriers. In concept, tariffs are designed to protect American industries. In reality, widespread use of tariffs will result in increased costs for businesses and consumers — as well as exposing nearly all industries to a system of taxation with which they have had no, or minimal, experience previously. It is absolutely essential for companies to devise strategies to minimize tariffs and duties now as a business cost or production input.
Here are a few key strategies.
Supply Chain Diversification
One of the most effective ways for businesses to minimize exposure to tariffs is by diversifying supply chains. Companies can identify alternative sourcing options in countries not subjected to prohibitive tariffs, or identify a domestic source. This approach not only helps in reducing tariff costs but also mitigates risks associated with over-reliance on a single country.
Utilizing Trade Agreements
Businesses should take advantage of existing trade agreements that may offer tariff exemptions. For instance, the United States has free trade agreements with over 20 countries, such as Australia, Singapore, all of Central America/DR, and Korea. Understanding and leveraging these agreements can lead to significant cost savings.
Tariff Refunds, Drawback Programs, and Deferral
Businesses should definitely explore duty drawback programs, which allow recovery of some tariffs paid on imported goods that are subsequently exported. This can be an effective way to reduce net tariff costs, especially for businesses with international customers. Additionally, applying for tariff refunds or exemptions for specific goods for reasons such as non-availability from domestic suppliers can also help reduce tariff costs. Similarly, leveraging foreign trade zones and bonded warehousing can allow businesses to stage the entry of goods in the United States market and, therefore, manage the timing of the recognition of the tariff as a tax.
Product Classification Review (Tariff Engineering)
Ensuring that products are classified correctly under the existing Harmonized Tariff Schedule (HTS) is crucial, as incorrect classification can lead to higher tariffs. A thorough review of the classification of goods, done in consultation with customs brokers or trade lawyers, can often help find lower tariff rates applicable to the products being imported.
Value-Added Manufacturing and First Sale
Focusing on value-added processes domestically can potentially shift a product's classification or status, allowing it to qualify for lower tariffs. By investing in domestic manufacturing and assembly, companies may enhance their ability to lower costs associated with tariffs on imported raw materials.
First sale is a system that decreases the dutiable value of imported goods by authorizing importers to use the price paid in the first sale in a supply chain. The system allows an earlier sale (which likely occurs at a lower price) to be used in declaring customs value as long as that sale can be documented as a sale for exportation to the United States and the importer meets all other customs requirements. Use of this system avoids paying additional tariffs on the increased price of goods that occurs when middlemen in the supply chain add subsequent costs to the price of the goods.
Although there are existing publications and guidelines for the use of this system, the requirements to meet all qualifications to identify and utilize a first sale are nuanced, and we recommend seeking legal advice before importing goods using the first sale rule.
Incorporating Tariff Management in Pricing Strategy
When tariffs increase, companies can adjust their pricing strategies. These adjustments often include absorbing some costs to remain competitive, passing the increased costs onto consumers in a measured way, or some combination of those approaches. Transparency about why prices are increasing can sometimes mitigate customer pushback if companies elect to pass along a large portion of the increased costs to consumers.
Monitoring Policy Changes
Tariff policies can change rapidly due to political negotiations or economic considerations. It’s vital for businesses to stay informed about policy changes, potential new tariffs, or negotiations that could affect their supply chains. Participation in trade associations or engaging with lobbyists can help keep businesses ahead of the curve.
Customs Compliance and Audits
Regularly conducting audits of customs compliance can help identify areas where companies may be overpaying on tariffs or failing to take advantage of exemptions. A thorough understanding of customs processes, including necessary documentation and valuation methods, can ensure that businesses are optimizing their tariff obligations. Again, experienced customs brokers or customs counsel can assist in these reviews.
Negotiate DDP Incoterms
International commercial terms (Incoterms) are published by the International Chamber of Commerce as a commitment to facilitate international trade and promote open markets. The ICC developed Incoterms to provide a common language for traders and to establish a global system of rules to govern trade. Incoterms are not law, and instead are designed to prevent confusion between global traders by clarifying contract obligations of buyers and sellers.
Negotiating Incoterms with partners in a supply chain is another way businesses can work to minimize import costs. Importers should review their contracts and negotiate a “delivery duty paid” (DDP) Incoterm. DDP terms place the responsibility (including export and import clearance, transport costs, import duties, and packaging costs) for the delivery of goods on the seller. With a DDP term in place, the seller then acts as the importer of record and has the ability to deduct costs, like freight, duty, and insurance, from the dutiable value. Another advantage of the DDP term is that, if properly structured, it can reduce the total impact of the tariffs.
Proceed with Caution When Attempting to Minimize Tariffs
Minimizing tariff costs amid the Trump administration’s anticipated protective trade policies will require a proactive approach. By diversifying supply chains, leveraging trade agreements, accurately classifying products, and maintaining compliance with customs regulations, businesses will better navigate the complexities of tariff impacts. Staying informed and adaptable will be crucial in ensuring sustained profitability in an evolving trade landscape.
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