The Intriguing History of Tariff Engineering in America
In 1881, a seemingly innocuous shipment of sugar caught the attention of American customs officials. The officials suspected that the sugar’s color had been altered to evade tariffs, as darker sugar was classified as a lower grade and thus subjected to higher duties. A chemical test confirmed their suspicions, leading to a landmark case that would eventually reach the Supreme Court. The court ruled that the importer had the right to alter merchandise to lower the duty rate, setting a precedent for future tariff-related disputes. This historical episode highlights the lengths to which businesses will go to navigate the complexities of trade regulations.
Modern Tariff Threats Under Trump
Fast forward to the present day, and the landscape of tariffs has become a hot topic once again, particularly under the leadership of former President Donald Trump. During his tenure, Trump frequently threatened to impose new duties on imports, claiming that such measures were necessary to protect American industries. Edward Steiner, a legal expert from Sandler, Travis & Rosenberg, warns that these wide-ranging tariffs could become “existential” for many companies. While relocating production to the U.S. is often touted as a solution, the reality is that the costs can be prohibitively high, prompting businesses to seek more creative alternatives.
The Challenge of Exemptions
For those hoping to replicate strategies from Trump’s first term, the outlook may be less than favorable. In 2019, Apple received exemptions from tariffs, but Trump has since promised “no exceptions” for any company. This shift in policy means that businesses looking to relocate production from China to Southeast Asia may find themselves facing the same tariff challenges in the near future. Dave Townsend of Dorsey & Whitney notes that even if companies move operations to countries like Thailand or Malaysia, they may still encounter the same tariff discussions in just a year and a half.
The Art of Tariff Engineering
Faced with these challenges, many companies are turning to innovative strategies known as “tariff engineering.” This approach involves altering products to change their official classification, much like the sugar manufacturer did in the 19th century. Tariff rates can vary significantly based on product classification, creating opportunities for businesses to save money. Lawrence Friedman from Barnes, Richardson & Colburn emphasizes that understanding these classifications can lead to substantial savings.
A notable example of tariff engineering comes from Converse, the iconic footwear brand. Over a decade ago, Converse modified the design of its Chuck Taylor All Star shoes, which are imported from Vietnam. By adding a layer of felt to the insole, the company was able to reclassify the sneakers as slippers, which are subject to a much lower tariff rate of about 6%, compared to as high as 48% for other types of footwear. Similarly, apparel manufacturers like Columbia Sportswear have added pockets to shirts and blouses to benefit from lower tariffs.
Geographic Manipulation of Tariffs
Another clever tactic involves manipulating the perceived origin of a product. Take, for instance, the cable harnesses used in Hyundai cars. While American customs officials classify these components as made in South Korea, the reality is that much of the production occurs in China. The raw materials may come from South Korea, but the finished product is sent back there for testing and packaging. By designing supply chains that strategically position production in locations with lower tariffs, companies can save money without the need for complete relocation.
Utilizing Legal Provisions to Mitigate Costs
If altering products or supply chains isn’t feasible, companies can also explore legal provisions to minimize their tariff burdens. The “first-sale” rule, established by a court ruling in 1988, allows importers to value goods based on the price charged by the manufacturer rather than the inflated prices set by middlemen. This can lead to significant savings on tariffs. Additionally, companies can delay duty payments by utilizing “bonded warehouses,” which allow them to store goods without incurring immediate duties until the items are sold. Temporary import bonds can also be employed for goods that are intended for re-export.
The Future of Tariff Strategies
Despite the potential for regulatory changes, businesses are likely to continue finding ways to navigate the complexities of tariffs. In 2008, America’s customs agency proposed scrapping the first-sale rule, but legal challenges thwarted that effort. Even if loopholes are closed, companies are bound to discover new strategies to adapt to evolving trade regulations. As one trade lawyer aptly puts it, “people want stuff, and they’ll get it one way or another.” The ingenuity of American businesses in the face of tariff challenges promises to be a captivating aspect of the trade landscape in the years to come.
