Shedding Light on New Tariff Impacts
Recent rulings have you tariff-ied? Relax. These steps will guide your way.
2018 was a tumultuous year for many global companies when, practically overnight, they were hit with a wave of suddenly volatile tariffs. For many, the impact was a direct hit to the bottom line. In October 2018 alone, tariff payments were up 104 percent from October 2017, while import values rose only 13 percent.
A tariff’s purpose is to increase acquisition costs of foreign goods to make domestic products more attractive. According to the Trump administration, it is levying these tariffs to protect national security and the intellectual property of U.S. businesses. The reality is that only a fraction of these tariffs apply to products that consumers buy. The majority of the tariffs affect “intermediate” and capital goods—components used to produce consumer goods.
As a result, consumers should brace for a wave of increased prices due to the tariffs. They will likely do their best to move away from imported goods impacted by the tariffs and purchase cheaper alternatives whenever possible.
Prepare for Impact
One significant challenge resulting from these new tariffs is that the availability of a domestic alternative is not guaranteed. And without a domestic alternative, it will likely cost a company more to produce its items. This reality may result in passing along increased prices to customers, moving production overseas, laying off employees, or potentially closing down production.
It has gotten even more complicated now that the European Union and countries including China, India, Turkey, Russia, Canada, and Mexico are imposing retaliatory tariffs on a number of goods that are essential to the U.S. economy.
So, what should U.S. companies do?
First, it is critical for a company to have the right data before attempting to answer that question. And to get the right data, companies must make sure that their products are classified under the correct Harmonized Tariff Schedule (HTS) code.
The HTS categorizes a product based on its name, use, and/or the material used in its construction and assigns it a 10-digit classification code. Each HTS code has an associated tariff rate or duty. There are more than 17,000 unique classification code numbers.
Companies can classify their own products, though the process is complex and requires a deep understanding of the products. One resource is Customs and Border Protection (CBP), which provides Informed Compliance Publications (ICP) that offer guidance on how to apply the General Rules of Interpretation and how to use the Explanatory Notes when classifying goods.
CBP also provides the Customs Rulings Online Search System (CROSS), a searchable database of CBP rulings.
Many companies are struggling as a result of the new higher duties on their imported products. The first step toward mitigation is understanding the fiscal impact of this new reality. Ask your customs broker for this information or obtain CBP’s free Automated Commercial Environment (ACE) account and run the entry summary lines by HTS number report.
With actual import data in hand, prioritize the report by the highest duty paid by HTS number. Compile a list of impacted section tariffs and total duty exposure based on previous imports.
Consider Additional Risks
Section tariffs also expose companies to other risks in addition to their fiscal impact, including:
- Customs bonds. Section tariffs result in duties levied on companies that previously had duty-free products. In the past, these companies paid nominal bond amounts because of the lack of duty exposure. Now, CBP is issuing insufficient bond notices that terminate insufficient bonds and demand that importers replace them with new bonds with the correct values. Because companies can’t import without a customs bond, this is a major issue for those that may not be able to afford the higher bonds or get the collateral to secure the bond.
- Incorrect classification. Some companies forget to ensure that their customs broker gets the correct classifications. This may result in the customs broker using the vendor HTS or an incorrect HTS. Include the HTS number on the commercial invoice to avoid any issues; more advanced companies include both the origin and destination harmonized codes.
- Entry correction. Incorrect classifications will likely mean having to correct prior import declarations. This is a significant undertaking and can result in increased costs and administrative burden.
- Requests for Information. CBP issues Requests for Information on imports of merchandise that they believe may be subject to section tariffs if the importer did not pay the additional duties. Requests for Information can indicate that the CBP is initiating a formal investigation. Respond quickly and completely to Requests for Information; do not rely on your customs brokers to respond.
There are several ways to minimize the impact of these tariffs:
- Tariff engineering. This is a legitimate way to leverage product design to lower duties. Look at options such as altering a product or using different materials to result in a different HTS, along with partial assembly or removal of essential functionality.
- Alternate sourcing and production. Determine if you can source or produce items elsewhere. If this is a viable alternative, estimate the cost of change and impact to cost of goods sold (COGS). Compare that to duty estimates if you don’t make sourcing changes. Some sourcing changes require the relocating production. If this is an option, review the costs to establish production in another country and its impact on COGS. Evaluate all options based on cost and the lead time required to move sourcing or production.
- Foreign Trade Zones (FTZs) or bonded warehouses. Evaluate whether key manufacturing processes can occur in an FTZ or bonded warehouse that would result in a new HTS that is not subject to the section tariffs.
- Duty drawback. If goods subject to section tariffs must be imported, will they be exported? If so, programs such as duty drawback may be an option.
2018 was the year of the tariff but don’t expect them to go away any time soon. Even if your company is not directly impacted, it is likely your suppliers are.
Look at these section tariffs as a global supply chain concern and don’t limit your analysis of the situation to a single country or source. These tariffs may be disruptive to global growth and prosperity so your company should be invested in understanding them and building business strategies to weather the storm.
Following the Origin Trail
Understanding a product’s country of origin is key to its classification, but it’s not as straightforward as you might think. Country of origin is only simple if a product is wholly grown, manufactured, and assembled primarily in one country. If the item is assembled in one country from components made in multiple countries, country of origin will be the country where the last substantial transformation took place.
For example, the Section 232 tariff actions on steel and aluminum imports were imposed for almost all countries, while the broader Section 301 tariff actions are for China alone. Once a company knows its Harmonized Tariff Schedule (HTS) numbers, it needs to know the item’s country of origin to determine if its products are subject to these “section tariffs.”
Recent Customs and Border Protection (CBP) rulings make determining the country of origin more complex. As many products are manufactured from components of multiple origins, it is critical to review costed bills of materials to determine country of origin.
In these rulings, CBP determined that items assembled in Mexico from China-originating components do not result in a substantial transformation. Thus, these items remain products of China for Section 301 purposes, although the item would be marked Country of Origin Mexico because the assembly did take place in Mexico. These recent rulings take the position that if the components do not undergo a physical change, then there is no change in character and no relief from the section tariffs.