Editor’s note: This is one of two articles focusing on strategies that mitigate the impact of tariffs on imported goods. Tax and business advisory firm KPMG identified seven successful tactics in its webinar TradeWatch: Section 301 Tariffs; What we’ve Learned in Year One. This article covers recommendations one through three.
Tariffs, according to leading tax and advisory firm KPMG, are here to stay. The best path forward for U.S. businesses? Deal with it.
“Businesses have come to realize that with geopolitical uncertainty comes either paralysis or opportunity,” said Douglas Zuvich, partner and global practice leader for trade and customs, KPMG LLP. “Most are now choosing opportunity. And those that can read the interconnected, proverbial tea leaves and are willing to take unflinching action are coming out ahead.”
KPMG, in a July 10 webinar, weighed in on expectations for the U.S.-China trade war and strategies that mitigate the impact of tariffs. Alexander Kazan, chief strategy officer for KPMG’s Eurasia Group, put the likelihood of a trade resolution by year-end at 30 percent. Even with the cease fire that the U.S. and China negotiated at June’s G20 summit, the trade goals of each nation remain miles apart.
The forces driving trade uncertainty are structural in nature, Kazan explained. Although trade is often associated with government policy, the U.S. conflict with China reflects a growing economic rivalry between the two nations; a changing geopolitical landscape; and the intertwining of technology and trade.
The electronics industry has advocated for better protection of its IP in China and less restrictive access to its markets. Electronics trade associations, however, have stated that tariffs harm U.S. competitiveness.
“The temporary agreement does not resolve the fundamental conflicts over trade issues that broke down talks in May and isn’t a sustainable solution for Huawei [a security concern for the U.S.],” Kazan said. “The agreement somewhat reduces the chances of further tariff escalation this year, while increasing the chances that the sides keep existing tariffs in place, perhaps through the end of the U.S. campaign cycle in 2021.”
KPMG also doesn’t rule out future tariffs on goods imported from the EU, Mexico and Canada.
Proven mitigation strategies
In the year since the first round of U.S. tariffs were levied, companies have learned how to lessen the impact on their business – and their customers’. Companies that have managed tariffs have become more competitive, Zuvich said. KPMG found companies implementing tariff mitigation strategies had an average savings of 59 percent on tariffs into the United States.
The most successful efforts employed:
- Product exclusion requests
- Country of origin adjustments
- Strategic sourcing
- Value reduction/first sale tactics
- Foreign trade zones and bonded warehouses
- Special Harmonized Trade Schedule (HTS) provisions
- Duty drawbacks
“The USTR [U.S. Trade Representative] is granting exclusions more willingly than expected,” said Jack Zeller, manager for KPMG’s trade and customs services. “There was skepticism about their willingness, but we have seen a high rate of success for well-argued cases.”
Companies hit by Section 301 tariffs may find relief by applying for exclusions with the USTR. Exclusions are considered under certain circumstances, such as a lack of available, competitive products outside of China; tariffs causing economic harm to an industry; or the products being sourced not benefiting China’s 2025 industrial initiative.
Companies must be prepared to support their exclusion request with research and hard data, said Zeller. Claims that “changing suppliers is a long and arduous process” have not succeeded. Instead, businesses should establish that no suppliers (in U.S. or outside of China) can competitively manufacture the volume of the product and meet quality standards, while maintaining low labor, material, and tooling costs.
U.S. passives manufacturer Kemet Corp. recently won an exclusion for its Tantalum Polymer capacitors. Tantalum capacitors having a conductive polymer cathode, as described in U.S. Harmonized Tariff Schedule 8532.21.0050, will no longer be subject to a 25 percent tariff levied on Chinese imports.
Kemet, the world’s leading producer of tantalum polymer capacitors, established it is the only vertically integrated, diversified, conflict-free tantalum supplier in the electronics industry. The component maker also touched on potential downstream damage to the market: polymer caps are widely used in automotive advanced driver assistance systems; autonomous driving applications; and in digitalization uses such as supercomputing, mobility services, connectivity and infotainment.
Products may also be excluded from tariffs if they are outside the scope of 10 industries targeted by the Made in China 2025 initiative, according to KPMG.
Country of origin adjustments
Importers have mitigated tariffs by moving portions of Chinese manufacturing operations to another country to achieve a change in product origin, according to Zuvich. The key to an effective origin adjustment is determining which components or processes are most relevant to the question of product origin, and relocating those outside of China.
However, Customs and Border Patrol (CBP) has increased scrutiny on importers declaring abrupt changes to product origin, Zuvich warned. Companies moving operations into and exporting from Taiwan and Vietnam are particularly under the microscope.
“This practice, also called trans-shipment, is fine; but any associated declarations have to be accurate,” he said. Country of origin review is particularly important in cases where finished goods are produced using components from multiple countries and finished/assembled in China; or those that include Chinese components but are finished/assembled outside of China.
The Taipei Times recently reported foreign companies are pushing the envelope on trans-shipment qualification and risk running afoul of U.S. laws.
The electronics industry, which has competed on a global playing field for decades, quickly adjusted its strategies to manage new trade policies. Electronics OEMs, distributors and suppliers typically source from multiple locations around the world and are able find alternatives to tariffed goods.
“We take a multi-tiered approach,” said George Whittier, president and COO of design and manufacturing services provider Morey Corp. “The first thing we do is try to find alternate sources where the products aren't manufactured in China. Second, we look at alternate but similar products from different suppliers. Lastly, we work with our customers to pass the costs along.”
“In talking with other EMS providers, we think [these strategies are] a pretty mainstream position,” he added.
At the same time, companies with factories in China want to lessen their reliance on the nation. Some businesses are moving operations back to their home countries to get closer to their customers. Other companies are moving operations closer to their end customers while preserving access to low cost labor and using free trade agreements. Mexico has been one beneficiary of this strategy, Zuvich said.
Other companies are moving operations out of China but staying in Asia for reasons such as supplier proximity and lower cost labor.
By establishing a source of supply in more than one jurisdiction while ensuring visibility and agility, companies can be ready for quick sourcing changes in the event of new tariffs or other market barriers such as sanctions and quotas, said Zuvich.
KPMG urges caution when companies consider strategies to relocate their production. “If you are going to move your manufacturing to change sourcing, or establish a new country of origin, it is a material decision,” said Zuvich. “It’s worth going to U.S. Customs and getting a binding ruling [that you are adhering to U.S. laws.]” Relocation can be an opportunity, he added, but it has to be done carefully.