Tired of Tariffs? Here Are 4 Creative Ways to Dodge Them
Tired of Tariffs? Here Are 4 Creative Ways to Dodge Them
There are a few creative—and legal—ways to dodge tariffs. Just ask these experts.
The Qingdao Qianwan Container Terminal in Qingdao, China. Photo: Getty Images
Business leaders have expressed their dislike of President Donald Trump’s tariffs. As I have written, business leaders do not like paying much more for the products they import and aim to sell to U.S. consumers and they particularly dislike the ongoing uncertainty that forces them to cut back on all but essential spending – thereby impeding future growth opportunities. And some businesses are starting to crack under the economic pressure.
Here are four ways to avoid paying tariffs or lessen their impact on your business. Before embarking on any of these strategies, business leaders should consult with and follow the advice of experienced experts—such as lawyers, accountants, and customs brokers.
Use tariff engineering to change a product’s official classification
“Tariff engineering” means tweaking products to change their official classification, Duties can vary significantly even when merchandise appears similar, and “therein lies the opportunity,” Barnes, Richardson & Colburn attorney Lawrence Friedman told the Economist.
For example, in 2015, Converse, a footwear brand, altered the design of its Chuck Taylor All Star shoes, which are imported from countries such as Vietnam, to change their classification. Converse added “a layer of fabric on about half the insole,” which enabled the company to reduce the tariff on its canvas trainers to as low as 7.5 percent – a big improvement over the 49 percent the company paid on other footwear, wrote the Economist.
Clothing manufacturer Columbia Sportswear “similarly added pockets below the waist on shirts, t-shirts and blouses to move them into a product category for which tariffs are lower,” according to the Economist.
Columbia Sportswear has formalized tariff engineering. “I have a whole team of people that work together with designers and developers and merchandisers and with customs, and to ensure that during the design process that we’re considering the impact of tariffs,” Columbia’s vice president of global customs and trade Jeff Tooze told Marketplace.
Making design choices to create different products subject to different tariff classifications and duty rates is not “inherently illegal,” Washington, D.C.-based Kelley Drye & Warren customs lawyer John Foote told CNBC. “Tariff engineering is one of the few things you can do to try to get it right and reduce your duty liability.”
Employ the first-sale rule to avoid paying a higher tariff
Another way to avoid tariffs is to use the first-sale provision, created by a court ruling in 1988, that allows importers to value goods based on the price charged by the manufacturer rather than the higher ones charged by middlemen, according to the Economist.
Here is an example. A Chinese manufacturer makes a T-shirt and sells it for $5 to a Hong Kong company that turns around and charges a U.S. retailer $10, Using the first sale rule, the U.S. retailer can declare the $5 price from the first sale as the basis for calculating import duties, according to ModernRetail.
Change the product’s country of origin through careful globalization of manufacturing activities
Manufacturers can also change the way they make their product so that enough of the process happens in a lower tariff country. For example, the cable harnesses in Hyundai’s cars are made up of wires, plastic coverings, and connectors.
American customs officials determined the harnesses were made in South Korea for setting the tariff – even though the raw material was manufactured in China. That’s because the finished harness was sent back to South Korea for testing and packaging.
It is less expensive to design supply chains so enough production occurs in a lower tariff country than to shift all manufacturing to that country, reported the Economist.
Keep your goods in a bonded warehouse
Finally, companies can ship their imported goods to a bonded warehouse without paying any tariffs when they enter the U.S. — as long as “they remain locked up in a special customs-regulated warehouse,” wrote CNN.
Inc.’s Jennifer Conrad wrote a handy guide to bonded warehouses here.
Businesses have five years to keep the imported goods tariff-free in the bonded warehouse. Leaders who choose this route are betting the goods will be in good enough condition to be saleable in the future and the tariff rates will go “down in the short or medium term,” CNN concluded.
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