Creative trade tactics return as firms look to bypass higher tariffs

As the world of global trade continues to navigate the complexities of tariffs and trade agreements, manufacturers are turning to a clever technique known as "tariff engineering" to lower their costs. This legal practice involves making subtle changes to a product's design, materials, or composition to qualify for a lower tariff rate. For consumers, the difference between a coat being classified as a windbreaker or a raincoat may seem negligible, but for businesses, it can mean the difference between paying a high tariff rate or a significantly lower one. With the current trade landscape becoming increasingly uncertain, companies are getting creative to avoid incurring higher duties, and tariff engineering is becoming a vital strategy in their arsenal. The concept of tariff engineering is not new, but it has gained significant attention in recent years, particularly since the Trump administration imposed tariffs on various countries. By altering the harmonized system code of a product, companies can take advantage of exemptions or lower tariff rates. For instance, after the Trump administration unveiled sweeping tariffs in April, some overseas manufacturers began bundling steel and aluminum elements into their final products to qualify for a lower 25% duty. However, when the tariffs were increased to 50% in June, companies quickly adapted by removing those elements and shipping them separately. This cat-and-mouse game between manufacturers and trade authorities highlights the complexities of the global trade system and the need for companies to stay agile and responsive to changing trade policies. The practice of tariff engineering is not without its challenges, and companies must tread a fine line between redesigning their products and misrepresenting their classifications. The U.S. Customs and Border Protection has a "binding ruling" system, which allows companies to obtain official determinations on product classifications and HTS codes before importing. However, some companies may be deterred from seeking such rulings, as an unfavorable decision could be constraining. Despite these challenges, many companies are successfully implementing tariff engineering strategies, with some household names like Columbia Sportswear and Converse making significant changes to their products to reduce tariff costs. For example, Columbia Sportswear added small zippered pockets to women's shirts, allowing them to be exempted from higher duties, while Converse adds fuzzy-felt fabric to the soles of its signature All Stars sneakers to categorize them as slippers rather than athletic shoes. The art of tariff engineering requires a deep understanding of the complex web of trade regulations and classifications. Companies must work closely with customs lawyers, supply chain experts, and designers to identify opportunities for tariff reduction. As the trade landscape continues to evolve, the importance of tariff engineering will only grow. While some may view this practice as a form of "outsmarting" customs, it is essentially a clever use of the existing trade rules to minimize costs. As John Foote, a customs lawyer at Kelley Drye & Warren, notes, "Tariff engineering is one of the few things you can do to try to get it right and reduce your duty liability." With the current trade tensions showing no signs of abating, companies will need to remain vigilant and adaptable to stay ahead of the game. The success of tariff engineering strategies depends on various factors, including the type of product, the industry, and the level of regulatory oversight. Fast-moving consumer goods and garments, apparel, and footwear sectors can find it relatively easy to implement tariff engineering, while more sophisticated and heavily-regulated sectors such as automotive, aerospace, electronics, and medical devices may face significant challenges. As Andrew Wilson, supply chain strategist at Supplino Inc., notes, "Even minor changes may require extensive validation and approval, which can take 12 to 24 months of testing, certification, and validation." Despite these challenges, companies are finding innovative ways to reduce their tariff costs, and the art of tariff engineering is becoming an essential tool in their trade strategy toolkit. In conclusion, the practice of tariff engineering is a clever and legal way for companies to reduce their tariff costs in a complex and ever-changing trade landscape. By making subtle changes to their products, companies can take advantage of exemptions or lower tariff rates, staying ahead of the game and minimizing their costs. As the trade tensions continue to escalate, the importance of tariff engineering will only grow, and companies will need to remain agile and responsive to changing trade policies to stay competitive. With the right strategy and expertise, companies can successfully navigate the complexities of global trade and come out on top.