Editor’s note: This is the second 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 four through seven.
The U.S.-China trade war continues to escalate as President Trump threatens to impose 10 percent tariffs on $300 billion of Chinese imports and China devalues its currency to make its products cheaper on the world stage. If there were doubts that tariffs were going to linger, those doubts have been all but dispelled.
“The president’s tweeted threat of new tariffs on Chinese goods is just a spectacularly bad idea,” said Ted Bauman, a senior research analyst and economist at Banyan Hill Publishing. “He's obviously playing to his political base and trying to influence the Federal Reserve's interest rate policy. Neither motivation has anything to do with what's good for the U.S. and global economies, or for the U.S.-China trade talks, for that matter.”
The electronics industry has been dealing with tariffs since June 2018, and the market's growth rate has slowed this year. In July, America's leading factory index declined for the fourth consecutive month, fueled by softening demand and trade uncertainty. Only nine of the 18 market sectors tracked by the Institute for Supply Management grew.
The best-case scenario for many U.S. companies, according to KPMG, is to mitigate the impact of tariffs on their -- and their customers' -- bottom line. Companies that have managed tariffs since their onset in June 2018 have become more competitive, the firm said, saving an average 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
Value reduction/first sale
Importers can use the first-sale principle to achieve cost savings, according to Jack Zeller, KPMG manager, Trade and Customs services. This practice, which has been around a long time, is attractive to companies importing traditionally high-tariffed products such as apparel and footwear.
First-sale should be considered by all industries impacted by 301 tariffs, said Zeller.
Under first-sale, the value of a product can be reduced so tariffs can be applied to a lower price. In a typical manufacturer-distributor-importer relationship, the first sale takes place between the manufacturer and the middleman (or distributor.) The second sale takes place between the middleman and the importer.
The value of the transaction between manufacturer and middleman – which is usually less than the value of the second sale—is used as the basis for tariffs. “First sale value is between eight and 10 percent lower than the second sale price so it can generate significant savings,” Zeller said. “There are a lot of companies exploring this strategy.”
Four elements are necessary for a first-sale declaration:
- Bona fide sale --The goods must be clearly destined for exportation to the U.S.
- Clearly destined for export -- Importer must substantiate that the manufacturer’s prices to a related middleman are at arm’s length
- Arm’s length price--The importer must be prepared to present to Customs all documentation that supports the above requirements
- Full documentation and recordkeeping
Companies that don’t have experience in first-sale will find the required documentation and record-keeping challenging, Zeller warned. “Set-up is time consuming and the practice relies on the buy-in of partners, which must share cost information for compliance. It’s more complicated than simply asking what a middleman paid the manufacturer.”
Foreign trade zones and bonded warehousing
Foreign trade zones (FTZs) can help importers obtain cash flow, avoid duties and maximize operational savings, according to KPMG. Since the implementation of 301 tariffs, companies with the right fact pattern have successfully reduced overall trade costs by integrating FTZs into their supply chain.
For goods within an FTZ, tariff payments are deferred until those goods are moved into the U.S. Tariffs can be avoided if certain goods are exported directly from an FTZ, said Doug Zuvich, KPMG partner and global practice leader, Trade and Customs services.
Advantages of an FTZ include:
- Duty is deferred for up to five years
- Liability for duties on that merchandise generally is cancelled when the merchandise is exported
- Goods can be stored duty free while tariff exclusions are pending Customs approval
FTZs may also be used to assemble and then export a product impacted by 301. Examination of a BOM is one way to determine suitability. If there are high-value Chinese components in the product it might be subject to tariffs, Zuvich said.
Special Harmonized Trade Schedule (HTS) provisions
Special Harmonized Trade Schedules are what KPMG calls “a mystery bag of mitigation tactics.”
The U.S. Trade Representative announced that 301 duties shall not apply to products for which entry is properly claimed under a heading or subheading in HTSUS Chapter 98. Depending on a product’s nature, use, or circumstances of import, Chapter 98’s special trade programs may offer significant duty savings, the firm said.
Commonly used provisions include:
- Partial duty exemption for American metals further processed abroad (9802.00.60)
- U.S. goods returned/repair (9802.00)
- Agriculture Use Provisions (9817.00.50/60)
- Nairobi Protocol (9817.00.92-96)
- Temporary Importation Bonds and Carnets (9813.00)
The goods retuned provision applies to electronics that are sent overseas for service or repair, then returned to the U.S. These products are duty-free.
Duty drawbacks allow for a refund of 99 percent of duties for merchandise imported to the U.S. and subsequently exported. The goods must qualify as any one of the following:
- Direct ID or substitution manufacturing drawback
- Direct ID or substitution unused merchandise drawback
- Rejected merchandise drawback
In most cases, an exporter may claim drawback within three years after the date of export and within 5 years of the date of import. Accelerated payment applications allow for accurate and compliant drawback submissions to be refunded within three weeks of electronic filing, according to KPMG.
Economists, market research firms and business consultancies are increasingly advising companies to plan for a long-term tariff environment. Prior to the recent escalation, experts floated the possibility of a year-end resolution the U.S.-China trade war. That appears more unlikely than ever. Both sides seem dug in until the 2020 U.S. presidential election is in the rear-view mirror.
“If we see this carry on beyond the end of the 2020 election, a new administration would still have to negotiate through these issues,” Bauman said. “So that’s still three or four years down the road.”
In the meantime, tariff-mitigation tactics can be combined to address a wide range of import scenarios, according to KPMG. “Companies come to us and say, ‘we have a plan for our product,’” Zuvich said. “One solution might not work. What I recommend is a plan for every product.”