Tariffs have become a dominant force in U.S. tax and trade policy, creating a complex challenge for businesses engaged in international commerce.

Since January, presidential executive actions have imposed new tariffs on imports from America’s three most significant trading partners—Canada, Mexico, and China—resulting in widespread market disruption. Implementing 25% tariffs on aluminum, steel, vehicles, pharmaceuticals, and semiconductors—with potentially more to come—has made it exceptionally difficult for businesses to protect themselves and their customers in the short term or develop effective long-term strategies.

As concerns grow over the impact of these steep new tariffs on U.S. companies and consumers, discussions have intensified about methods businesses might employ to mitigate these costs.

The president’s long-threatened taxes on imports from China, Mexico, and Canada took effect Tuesday, triggering retaliatory measures against American exports, creating stock market volatility, and amplifying fears of an economic downturn.     

Navigating Tariff Challenges in U.S. Trade Policy

U.S. companies face a significant challenge in deciphering the complexities of tariffs. Success hinges on their ability to quickly analyze data, adapt to policy changes, and strategically protect their bottom line. To build resilience and maintain competitiveness in this unpredictable tax and trade landscape, businesses should consider the strategies outlined in a recent CFO.com article. 

1. Optimize Trade Operations:

• Comprehensive Process Review: Conduct a thorough review of existing trade processes, personnel, and systems to enhance compliance and minimize tariff exposure.
• Contractual Flexibility: Incorporate clauses into contracts that allow for price adjustments or tariff-sharing to safeguard profitability.
• Strategic Streamlining: Implement a strategic approach to streamline operations and proactively prepare for future trade challenges.

2. Diversify Supply Chains:

• Risk Mitigation: Reduce risk by diversifying sourcing to alternative suppliers in countries with lower tariffs.
• Resilience and Continuity: Build supply chain resilience and ensure operational continuity through diversification.
• Supplier Renegotiation: Actively renegotiate contracts with both domestic and international suppliers to address tariff impacts.

3. Maximize Duty Mitigation and Recovery:

• ROI Analysis: Conduct a thorough return on investment analysis of various duty mitigation and recovery programs.
• First Sale for Export: Leverage lower dutiable values through first sale for export transactions to significantly reduce duty costs.
• Foreign Trade Zones (FTZs): Utilize FTZs to defer tariff payments until goods enter U.S. commerce, providing a strategic advantage.
• Duty Drawback: Explore duty drawback programs for potential near-full tariff recovery, noting limitations for certain tariffs.
• Valuation Unbundling: Optimize declared values by removing non-dutiable costs, which is especially beneficial for otherwise duty-free goods.
• Operational Transfer Pricing: Coordinate with transfer pricing teams to ensure related-party transaction values comply with tax and customs requirements.
• Tariff Exclusions: Pursue tariff exclusions based on economic and business justifications to alleviate financial burdens.     

As an NPR article reveals, businesses employ various strategies to circumvent tariffs, ranging from costly production relocation to innovative product redesign, known as tariff engineering. This creative approach, for example, explains the use of fuzzy fabric in Converse sneakers. 

Lobbying for Exemptions:

• Companies can petition the government for tariff exemptions, but this process has been criticized for lacking transparency and potentially favoring politically connected firms.
• While the government has granted some exemptions, the success rate is low, and political influence can play a significant role.

Shifting Sourcing and Production:

• Businesses can relocate production or diversify their supply chains to avoid tariffs, but these changes can be expensive and disruptive.
• Relocating assembly to the U.S. or shifting sourcing to tariff-free countries are options, but they may increase costs and could face future tariffs.

Tariff Engineering (Product Redesign/Reclassification):

• Companies can creatively redesign or reclassify their products to qualify for lower tariff rates.
• Examples include reclassifying action figures as non-human toys, adding features to Santa suits to qualify as festive articles, or altering Converse sneakers to be classified as slippers.
• This is a method of product adaptation to tariff code, and can be a very creative way to avoid higher tariffs.   

Conclusion 

While tariffs and evolving trade policies present formidable challenges, strategic preparation, innovative thinking, and adaptive capacity are key to navigating these complexities. By proactively responding to regulatory shifts and supply chain disruptions, businesses can enhance their resilience and strategically position themselves for sustained success in the contemporary trade environment.