The world has been thrust into a new series of tariff actions and pending threats. The Trump administration has already imposed, then paused 25 % tariffs on Canada (10% on certain energy items) and Mexico. A 10% tariff has been implemented against China (including Hong Kong) which is on top of previous Trump tariffs imposed during 2018-20 and which still remain in force. The new tariff is across the board and not against a specific list of products as it was in the past. These recent actions were taken to combat the illegal flow of fentanyl and other drugs which are believed to originate in, or pass through, these targeted counties.
There are additional actions threatened against the European Union due to the imbalance of trade. Such new tariffs would most likely be imposed on a list of specific tariff codes but no one really knows. There is also talk of targeting other countries with significant trade imbalances or where their import tariffs are much higher than the U.S. import tariffs, e.g., India. Recent rhetoric has also called for new investigation against “essential medicines” and other strategic products that could lead to new tariffs (similar to what have been imposed on steel and aluminum).
All this uncertainty leaves many companies in the quandary of what to do. The Trump administration would like the solution to be to move manufacturing to the United States. However, for many companies and industries, that is either impossible, impractical, economically unfeasible and/or there is a lack of capacity.
The answer then becomes that companies need to reexamine their supply chains to determine whether the impact of customs duties – those in place and those that may be coming – can be reduced. In this regard, all companies should review the following strategies:
- Reduce the valuation: There are many strategies to address customs valuation. Whether involving related party transactions, internal manufacturing, unbundling non-dutiable costs or purchases through trading companies, there are legal strategies to lower the cost basis upon which the duty is applied.
- Shift the country of origin: In most cases where there are no free trade agreements, the United States applies a “substantial transformation” test to determine the country of origin of a product subject to multi country processing. This is a subjective standard that often tries to determine where the essential component of a finished product originates. For example, U.S. Customs often finds that the origin of a programmed integrated circuit will dictate the origin of a finished machine or appliance. The final conclusion is not always obvious and sometimes a simple shift in the supply chain can move the origin of a product away from the tariffed country.
- Confirm the Tariff Classification: The Harmonized Tariff is a complex nomenclature. Often, there are more than one possible tariff provision that can describe a particular imported article and which have different duty rates. One should not always assume that the tariff code being applied is the most correct one, even if it has been used for many years.
The take away for all companies involved in cross-border trade: customs duties do not have to be a fixed cost—they are a variable cost if approached carefully.
(Stand: 10.02.2025)
Writer: Peter W. Klestadt, Senior Partner
Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP
pklestadt@gdlsk.com
