Minimizing Disruption from Tariff Threats
On Sunday President Trump sent out a pair of tweets stating he was not happy with the pace of progress in trade talks with China. He indicated that this Friday punitive tariffs on $200B in Chinese goods will increase from 10% to 25%. He also stated he planned to increase tariffs on another $325B worth of Chinese goods “shortly”.
Leaving aside the fact that this is no way to decide or announce tariff rates, it will be difficult to keep trade talks on track if Beijing risks being seen as caving in to Washington. No one likes to negotiate with a gun to his head.
The current Section 301 tariffs have already slowed trade growth at great expense to U.S.consumers and, due to retaliatory tariffs from China, U.S. farmers. Without considering this potential increase in tariffs the WTO already forecast global trade growth dropping from 3% last year to 2.5% this year.
If indeed the increased tariffs go into effect, how can the importing and supply chain community minimize disruption to business?
In a politicized trade environment, it’s important for your voice to be heard in Washington. Call or write your elected officials and work with industry trade groups who actively lobby for free trade.
While the negotiating process continues in Washington, here are three steps importers can take now:
Investigate alternative sourcing origins - domestic, near shoring to Mexico, other Asian origins
Explore changing the product you import to one that isn’t covered under an effected HTSUS classification (sometimes described as legal tariff engineering)
Minimize risk by reducing the size of your purchase orders and shortening the validity period of client quotations
Importers and customs brokers should also consider ways to reduce the amount of duty due. Under the 9802 exemption program, an importer may reduce duty payments by deducting from the cargo’s entered value the value of any U.S. content. A second provision, the First Sale of Export program, allows importers to declare for entry purposes the first sale price between a manufacturer and vendor, rather than the marked-up selling price between a vendor and the importer.
Free Trade Zones postpone duty payment until the merchandise is shipped out from the zone into U.S. Commerce. It’s important to also note that goods exported from a FTZ do not incur any duty expense. This makes a zone admission a great solution if an importer will be exporting some portion of the imported cargo. For example, if Latin American and Caribbean markets are supplied with Chinese made product sourced from the U.S. the use of a zone will entirely eliminate duty payment.
While punitive duty rates will be disruptive to supply chains, employing a broad range of trade tactics will make the best of a difficult situation.