What Is Your Tariff Strategy?
Panic. That’s what many companies are feeling now that nearly 6,000 Harmonized Tariff Schedule (HTS) item classifications have been identified for the imposition of a 25% penalty tariff on imports from China. Steel and aluminum tariffs apply more broadly to imports from many countries. These tariffs are adding cost to supply chains, but no value. It appears that the trade wars aren’t going to end anytime soon. The Section 232 tariffs apply to aluminum and steel as of June 1, 2018. The Section 301 penalty tariffs on Chinese imports are in three tranches:
- Section 301 penalty tariffs on Chinese imports (List 1) July 6, 2018
- Section 301 penalty tariffs on Chinese imports (List 2) August 23, 2018
- Section 301 penalty tariffs on Chinese imports (List 3) September 6, 2018
Whether or not these tariffs will be effective in addressing the policies of foreign governments is anybody’s guess. In the meantime, what action should supply chain professionals take now to mitigate the effect on supply chains? What is your company’s tariff strategy?
Country of Origin
It’s important to understand that if your parts, subassemblies, or finished goods are on the list of 6,000 items, you cannot avoid paying the penalty tariffs on importing into the US. You should work with your Customs Broker to determine if your imports are on any of the lists. If the Country of Origin (COO) is China, the penalty tariffs apply. Period. Trans-shipment via another country will not change the Country of Origin or help you avoid paying the penalties. We’ve heard tales of Chinese manufacturers suggesting that trans-shipping via Vietnam or Singapore and declaring these places as the COO will avoid the 401 tariffs. But this is illegal under U.S. Customs Regulations (CFR 19) as the COO must be the place where the goods are manufactured or substantially transformed, not where they are trans-shipped.
Buy More Inventory
Some of our clients have been stockpiling inventory in advance of the tariffs going into effect. The result has been shortages of all kinds of parts worldwide for companies that are not stockpiling. In addition, hoarding parts ties up working capital and may put a stranglehold on your company’s ability to operate. In industries with rapid product development such as electronics, parts also become quickly obsolete, so buying too far in advance is a losing proposition.
Use of a Foreign Trade Zone
Perhaps you are considering the use of a Foreign Trade Zone to substantially transform component parts into a new product and a new HTS number. Unfortunately, certain provisions in Section 301 require payment on the value of the Chinese component content regardless if you are now importing transformed finished goods from the FTZ. Even if you move goods from the Zone directly to Mexico or Canada under NAFTA provisions, the penalty tariffs still apply. With NAFTA negotiations currently underway, the future of tri-lateral trade in North America is uncertain.
Moving Sourcing or Manufacturing to an Alternate Country
Some companies are scrambling to move as much production as possible to other production sites in Vietnam, Indonesia, Thailand, or other low-cost countries. While the 301 tariffs don’t apply to importing from these countries so far, the future application of new tariffs is uncertain. Most of our clients will also admit that productivity rates in other low-cost countries are 20-30% lower than in China. So in the final economic analysis, it is often better to keep production in China and pay the penalty tariffs.
Return Manufacturing to the U.S.
Returning or establishing manufacturing in the U.S. is our favorite strategy at the Reshoring Institute. We are currently helping several clients identify locations and determine the economic feasibility of manufacturing here. Over the long term, this is a great strategy, especially if your customers are in the U.S. But it takes time to reestablish and find new suppliers in the U.S. Most new suppliers have to be qualified and certified to produce your parts and this could take as long as 12-18 months. In the meantime, if you must import parts or kits from China to support production, you will still be stuck paying the penalty tariffs until you can source domestically.
Increasing Product Costs to Your Customers
In the end, consumers always pay the price for increasing tariffs as these costs are passed-through to customers by importers. Economists tell us that sooner or later, consumers will balk at increased prices and stop or limit buying your product. Most companies simply cannot or will not absorb the additional cost of goods sold burdened with 25% tariffs, and instead will tack on the increased costs to the selling price of finished products. As long as all of your competitors are doing the same, this is no problem. But if some competitors can sell for less, you may see an unfortunate drop in demand for your products, due to non-competitive pricing.
Exports to other countries are also affected. Trade wars mean that countries will retaliate with their own import tariffs on American goods. Unfortunately, retaliatory tariffs are often meant to hurt economic sectors unrelated to U.S. tariff categories. For example, U.S. 301 tariffs may apply to electronic goods imported from China, but Chinese import tariffs apply to soybeans or almonds.
No matter what your opinion about trade wars, it’s in your best interest to develop a strategy that will work for your company. Let’s all hope the trade wars are over soon.
About the Author
Ms. Coates is the Executive Director of the Reshoring Institute and the President of Blue Silk Consulting, a Global Supply Chain consulting firm. She is a best-selling author of: 42 Rules for Sourcing and Manufacturing in China and Legal Blacksmith – How to Avoid and Defend Supply Chain Disputes
Ms. Coates lives in Silicon Valley and has worked with over 80 clients worldwide.
She is also an Expert Witness for legal cases involving global supply chain matters.
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