Tariffs: Strategies to Help Mitigate Import Risk and Cost

Free trade zones (FTZs), robust supply chain sourcing assessments and U.S. subsidiaries to handle sales and customer service are among the more than 20 methods organizations can leverage to mitigate risk and control costs when importing goods.

In response to the U.S. Supreme Court striking down the International Emergency Economic Powers Act (IEEPA)-imposed tariffs in February, President Donald Trump imposed replacement tariffs of 10-percent under Section 122 of the Trade Act of 1974. Those duties are set to expire in July, but supply managers can anticipate that the Trump administration will continue to utilize duties as trade leverage.

The first 16 strategies, which include FTZs, drawback and tariff engineering, are detailed in “The Supply Manager’s Tariffs Survival Guide” in the March/April issue of Inside Supply Management^®. The other five, explained here, are:

• Robust supply chain sourcing assessments
• External guidance and expertise
• The FTZ model to bring in parts, components and materials for finishing the manufacturing or assembly process in the U.S.
• A domestic intermediary, such as a subsidiary, in the U.S. to oversee sales, customer service and various maintenance concerns
• Tight control of outsourced customs clearances.

Supply Chain Sourcing Assessments

Where and how we source finished products, materials, parts and components will have a direct impact on landed costs.

Global sourcing professionals often work hard to negotiate a favorable acquisition cost but do not evaluate the other four silos impacting the landed-cost model. That evaluation is a critical aspect of responsible and successful supply chain management.

With the Trump administration using tariffs to realign global trade, sourcing managers must evaluate long-term embedded supply sources as the cost of duty makes it more problematic to source from such countries as China, Brazil and Canada. Also, certain types of products containing steel, aluminum and copper now face significant cost hurdles due to tariffs.

Additionally, all de minimis shipping — the US$800 level for duty-free customs clearance and duty obligations — has been eliminated. Further complicating trade management is the pace with which executive orders are being issued and subsequently changed. 

To mitigate risk and disruption, consider:

• There are numerous sourcing options for many products if you search diligently. The acquisition cost may be higher, but the landed cost may be more favorable.
• In FTZs, some manufacturing and assembly can be successfully brought back to the U.S.
• A understanding of where trade agreements are now in place — including Great Britain, South Korea, Vietnam, Malaysia, Australia, Mexico and the European Union (EU) — might present favorable landed costs, with better duty treatments.
• Diversification of the sourcing portfolio, with some higher costs, is a risk management strategy.
• Using alternative materials in the manufacturing process can result in lower costs or greater sourcing availability.
• Raising the bar of sourcing and procurement teams, gaining additional resources and increasing budgets will help those teams be more effective.

Bringing in Guidance and Expertise

Global supply chains are experiencing more aggressive challenges and roadblocks, increasing demand for external support. There are many consultants and advisory practices that specialize in trade disruption and have experience in managing solutions customized to specific supply chain needs.

It sometimes “takes a village” to get through adversity. The village includes external expertise and numerous other resources that can provide timely information that can prove beneficial in allowing for more informed decision-making.

There are real solutions out there, not so much for elimination of risks and spend, but more so in mitigation.

Parts Versus Finished

For some inbound supply chains, the duty rates of materials, parts and components carry less duty than finished products. This might afford the opportunity to bring certain manufacturing and assembly operations back to the U.S.

The FTZ model can offer a beneficial operating structure in that business model, bringing in parts, components and materials and finishing the manufacturing or assembly process in the U.S., utilizing American labor, overhead and value-add.

A detailed line-item review of the Harmonized Tariff Schedule (HTS) numbers of parts versus finished products, imported versus assembled here, must be performed to evaluate the costs and ROI.

Domestic Intermediary

Many foreign exporters have registered subsidiary companies in the U.S. to manage sales, customer service and maintenance concerns. The selling price typically includes their profit.

Let’s say an exporter’s profit margin is 40 percent on a $500,000 transaction, with a duty rate of 15 percent. Alternatively, it could do an internal transaction to a related party at the $300,000 transaction value, meeting wholesale pricing standards. This would save almost $30,000 in duty. The U.S. subsidiary would have the tax obligation on the sale, which, with write-offs and constructive accounting, would be much less than the duty costs.

Transfer pricing with related parties is closely watched by both U.S. Customs and Border Protection (CBP) and the IRS, so reviews by accountants and outside trade consultants can help assure compliance and the ROI.

A More Aggressive CBP

CBP is buckling down on enforcement and working in conjunction with the U.S. Department of Justice to weed out import fraud in such areas as HTS classification, origin, valuation, forced labor and record-keeping. Also, CBP has increased its enforcement teams and utilized technology, particularly with AI, on import issues — pursuing what used to be minor infractions as more serious cases of fraud.

Importers need to be more diligent and more tightly control the performance of their outsourced customs clearances. Key trade compliance controls fall into three primary categories: due diligence, reasonable care, and supervision and control.

These five areas are among the ways supply management organizations can use to mitigate risk and control costs when importing goods to the U.S.

(Image credit: Getty Images/Rawintanpin)