Coping with Tariff Rising: Tariff Minimization Strategies

Donald Trump supports tariffs. Ahead of the 2024 election, he called himself a “tariff man” and said tariffs were “the greatest invention ever” and “the most beautiful word in the dictionary.”

While specific details of Donald Trump’s tariff plans have not yet been released, he has made multiple public statements about the tariffs he is considering. At a rally in North Carolina, he proposed imposing 10-20% tariffs on all imported goods. He also said he would impose a 25% tariff on Mexican imports if Mexico did not help curb the flow of immigrants and drugs across the border. He also suggested imposing tariffs of 60% to 100% on Chinese-origin goods.

So, what can importers do to prepare? a lot of!

First, what are tariffs?

A tariff (also called a tariff) is a tax levied by the government on the value of imported products. Tariffs vary by country and specific product. In the United States, tariffs are collected by U.S. Customs and Border Protection (CBP) and funds flow to the U.S. Treasury Department.

The importer of record is responsible for correctly classifying his goods and paying the appropriate duties. The tariff is no Paid by the foreign seller or the country importing the goods, so the cost is typically passed on to U.S. consumers.

Learn more about how tariffs work here.

Strategies to Minimize Tariff Costs

There is no doubt that the increase in tariffs will have a significant impact on any business involved in importing goods into the United States. However, importers are not without options. Here are a few strategies legally Minimize tariff costs.

tax refund

If you import a product into the United States solely for the purpose of exporting it to another country, you may be entitled to compensation for the duties you paid when importing it into the United States. The rebate provision provides a refund of up to 99% of certain duties, domestic income taxes, and fees charged by CBP upon importation. Refunds are only available after the items in question have been exported or destroyed (under CBP custody).

In order to obtain a tax refund, the customs broker must submit an application to CBP on behalf of the importer. While it can be beneficial, it is important to realize that the tax refund process is detailed and can take months before any monetary compensation is received. Some of the required information includes proof of export or destruction, and proof of original payment of customs duties.

Tariff project

Tariff engineering involves changing the condition of goods before importation so that they are legally classified into a favorable Harmonized Tariff Schedule of the United States (HTSUS) classification and thereby benefit from lower tariff rates. Because CBP can only impose tariffs based on the condition of goods when they are imported, tariff engineering gives importers the opportunity to redefine their imports and pay lower tariffs.

Importers cannot simply reclassify the exact same goods under a different HTSUS (which would constitute circumvention); rather, the imported products must actually embody the qualities of another HTSUS, which happens to have lower tariffs.

In order to properly reclassify imported merchandise, importers should review the merchandise’s HTSUS classification and determine whether any modifications can be made to the product prior to importation that would allow a more favorable classification to be applied. It is necessary to meet with an expert to discuss your specific products and packaging to determine whether minor adjustments will have a significant impact on tariffs.

Change of origin

Another option is to consider relocating operations or the country of sourcing, i.e. the country of origin of the product. If a country’s import tariffs are much higher than similar third countries, you can move your supply chain to a duty-free country.

While the initial relocation may be costly, changing the country of origin will allow you to import the exact same items without paying additional duties. If you are considering this option, you must know the list of countries with which the United States has free trade agreements. While another country may not be subject to substantial tariffs, moving your supply chain to a country with a formal, free and fair trade agreement with the United States ensures accountability and reliability.

After Donald Trump won the election, at least one American company, Steve Madden, has announced their intention to reduce imports of Chinese-made goods into the United States to avoid higher tariffs.

first sale

First sale is a system that reduces the duty-paid value of imported goods by authorizing the importer to use the price paid on first sale. It allows the use of an earlier sale when declaring a customs value, as long as the sale can be recorded as an export to the United States and the importer meets all other customs requirements.

Therefore, the equivalent value is allocated based on the transaction between the manufacturer and the intermediary, rather than the transaction between the intermediary and the new buyer.

CBP’s Informed Compliance publication, “Good Faith Sales and Sales for Export to the United States,” discusses two elements required to qualify for the First Sale Program.

The importer must determine:

• “Goodwill” sales and
• The goods were apparently destined for export to the United States when sold to the middleman

If both of these elements are present, the transaction value requirement is met. However, the “bona fide” sale requirement is nuanced and we recommend seeking legal advice before importing goods using the first sale rule.

Deferred tax payment

If importers are unable to reduce their tariff burden, they may consider deferring tariff costs through foreign trade zones and/or bonded warehouses.

foreign trade zone

Foreign Trade Zones (FTZs), while technically located within the geographic boundaries of the United States, are considered secure areas outside of U.S. customs territory. Domestic and foreign goods can enter the free trade zone for storage, exhibition, assembly, manufacturing, redistribution, processing and other business activities. Free trade zones allow users to defer, reduce or eliminate tariffs.

Bonded warehouse

Unlike free trade zones, bonded warehouses are located within U.S. customs territory. The Customs Bonded Warehouse is a secure area where imported goods can be stored tax-free for up to 5 years.

Importers can repackage, classify or label imported products at these locations under the supervision of U.S. Customs officials. Processing of goods is generally prohibited unless approved by U.S. Customs.

Use caution when trying to minimize tariffs

Importers seeking to minimize duty liability should always work with an expert to ensure they continue to comply with all U.S. customs regulations. Tax evasion is a serious crime and may result in stiff fines or even jail time if fraud is committed.

At Diaz Trade Law, we have a proven track record of duty minimization and customs compliance. To learn more about how we can help, contact us at info@diaztradelaw.com or call 305-456-3830.

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