Global Trade: Popular U.S. Tariff Mitigation Strategies

How companies are reducing the impact of tariffs

Watching the world news over the past two years, there seems to be a noticeable amount of upheaval and uncertainty in global trade.  From the Middle East to Hong Kong, Latin America and the European Union, countries are struggling for equilibrium, challenging each other to determine fair trade policies in the new global economy.  International trade has always had its pitfalls.  While leveraging tariffs may have a comparative advantage, it also can have unforeseen consequences. 

Looking for a way to mitigate tariffs on imported goods?  Read on.  Over the past two years, use of the First Sale Rule has increased demonstrably.  Today, the First Sale Rule is being used by manufacturers and retailers to mitigate the impact of the additional Section 301 tariffs on goods imported from China. Because of this, U.S. Customs and Border Protection (CBP) has stepped up scrutiny of imports claiming valuation of goods under the First Sale Rule.

First Things First:  Here’s How Tariffs Work

A tariff is simply a tax imposed by one sovereign nation on goods that are imported from another sovereign nation.  Tariffs are of two types:  a fixed fee based on the type of goods or an ad-valorem tariff that is levied based upon the value of the goods, such as a percentage of the value of the goods.  Tariffs and other assessments, are collected at the time of customs clearance in a foreign port.  In accordance with U.S. law, the transaction value of the goods sold is the preferred method of valuing imported goods for customs purposes. 

Some goods are sold multiple times before importation. 

Governments use the power of tariffs for a variety of purposes such as to:

  • Increase revenue
    • Apply economic or political leverage as an extension of a country’s foreign policy
    • Protect domestic products or industries from foreign competition
    Countries use tariffs to impede imports by raising the price of goods and services purchased from another country. Raising the price makes the items less appealing to domestic consumers.

    What is the “First Sale Rule”?

    In the incidence in which there are multiple sales of goods before their importation into the United States, the First Sale Rule enables importers under specific circumstances to utilize the price that was paid in the “first or earlier sale” as the basis for the customs value of the goods instead of the price that the importer ultimately paid for the goods.

    A 1988 case litigated by law firm Sandler, Travis & Rosenberg established the First Sale Rule. Here is how it works: The transaction must be documented as a sale for exportation to the United States and the importer must comply with all Customs requirements including producing the original invoice documenting the first sale of the goods.

    The first sale must use a middleman as a buyer (i.e. from the manufacturer) who then acts as the seller in the second sale of goods that are exported to the United States. The goods must clearly be destined to be exported to the U.S. at the time of the first sale. In addition, the seller/foreign manufacturer and the buyer/middleman either must not be related or must conduct transactions at “arm’s length”, if related.

    The invoice between the vendor and the factory will be presented to Customs for the appraisal of merchandise and duty assessment. Additional documentation is required as to the bona fide nature of the transaction and other related details.

    Take Steps to Help Ensure a Successful First Sale Program

  • Be pro-active. Make sure that multi-tiered transactions meet the requirements of the First Sale Rule.
  • Employ internal controls and procedures to ensure adequate documentation of compliance.
  • Make sure that importers communicate clearly and effectively with trading partners as information is often retained by partners across the supply chain.
  • Importers need to clearly define their responsibilities with respect to recordkeeping and maintenance.
  • Failure to comply with First Sale Rule requirements, including documentation and recordkeeping may lead to penalties.
  • Mexico, Hong Kong and Canada

    American companies are taking advantage of other loopholes to avoid or minimize tariffs imposed by President Donald Trump. One of the most popular ways of avoiding tariffs it to ship packages that are worth less than $800 to the homes of U.S. consumers from other countries including Canada, Hong Kong and Mexico.

    Many American companies ship goods from China into the United States then re-export the same goods to Canada, reselling them to Canadian distributors, wholesalers, retailers and consumers. Without having a Canadian subsidiary or warehouse, a company would be obligated to pay the full amount of tariffs when importing the goods into the U.S. Applying for duty drawback or other form of duty relief could be done when the goods are re-exported to Canada. If, however, no application is made for duty drawback or relief, the company or consumers will bear the brunt of the full cost of tariffs.

    An alternative is to set up a Canadian subsidiary business or leverage a Canadian 3PL warehouse.  The American company would need to ship goods directly from the Chinese manufacturer to the 3PL or subsidiary in Canada and store inventory in Canada.  Canadian wholesalers, retailers, distributors and consumers would place orders which would then be fulfilled from the inventory in the Canadian 3PL or subsidiary’s warehouses.  The American tariffs would not be payable, however customs duties would be due to Canada and could be factored into the selling price of the goods.

    Leveraging Mexico to lower the cost of transportation and logistics has been a proven strategy for years.  The cost of shipping a container to Mexico is a fraction of the cost it is as compared to those shipped directly to the United States.  Did you know that Mexican imports into the United States have skyrocketed in a decade?  Up about 65%!    Warehouse workers in Tijuana are paid a mere $2 to $4 as compared to $18 to $24 in California and real estate, a huge cost in warehousing is less than half of the cost of California land.

    The warehouse business is booming in Tijuana Mexico due to companies trying to mitigate the cost and effect of U.S. tariffs.  Retailers and manufacturers are flooding to the city setting up warehouses to reduce the impact of tariffs.  As Tijuana is only 20 miles south of San Diego, this provides both tariff savings and an entry point into the huge consumer market of Southern California.

    Section 321 of the Code of Federal Regulations enables U.S. based companies to send individual parcels with a value less than $800 duty-free.  This loophole in Customs’ law is in relatively widespread use by e-commerce businesses, shipping large volumes of low-volume parcels daily to consumer homes.  Today, cross-border e-commerce accounts for 15 to 20 percent of the world’s online traffic and it is growing at nearly double the rate of domestic e-commerce.  The $800 threshold, sometimes referred to as Section 321 or the de minimis rule was increased from $200 in 2015.  Section 321 has become hugely popular, ramping up set up of new 3PL fulfillment centers in Canada and Mexico stocked with inventory awaiting e-commerce orders.

    What Is “Section 301”?

    In August 2017, the Trump Administration White House launched a Section 301 investigation into China’s policies on intellectual property (IP), innovation and technology.  Section 301 of the U.S. Trade Act of 1974 authorizes the President to execute all appropriate action to remove any act, policy or practice of a foreign government which either violates an international trade agreement or is unreasonable, discriminatory or unjustified and which places burdens on or in some way restricts the commerce of the United States.  This includes retaliatory action.

    The United States Trade Representative (USTR) or a petition by an industry group or firm may be the impetus of a Section 301 case.  U.S. law does not require that the American government wait for authorization by the World Trade Organization (WTO) in order for enforcement action to be taken.

    Sections 301 through 310 of the United States Trade Act of 1974 commonly referred to as “Section 301”, are one of the primary statutory tools used by American officials to enforce U.S. rights under trade agreements.  Section 301 is also used to deal with “unfair” foreign barriers to U.S. exports.

    Conclusion

    Adam Smith, watch out!  News from a prominent Washington D.C. Twitter account announcing another round of tariffs on Chinese goods on September 1st hit manufacturers, retailers and capital markets hard.  Concerned about diluting economic growth in the peak holiday season, some of the tariffs were walked back to start December 15th after considerable pressure was brought to bear on the White House.  Concern about the impact of China tariffs and the escalating trade war have taken hold.

    One does not have to have attended business school or follow the financial news in detail to understand the objections of more tariffs hitting during a holiday shopping season.  The use of tariff mitigation strategies by retailers and manufacturers has become more widespread in the past few months, especially for certain types of goods including apparel.  Use of the First Sale Rule requires trust, cooperation between buyers and manufacturers and plenty of documentation but can result in significant savings.  Sending individual packages valued at less than $800 from countries including Canada and Mexico results in no duties but would involve costs for boxing up the direct shipments to individual homes, payment to the shipping carrier, etc.  E-commerce companies have made Tijuana especially popular using this strategy.

    Until trade talks on China tariffs occur and a U.S.-China trade agreement has been hammered out and signed, the supply chain industry is likely to be jumpy due to the high level of uncertainty involved with producing and getting goods into the hands of end consumers.  International trade is definitely a tricky business these days, not simply because of the exchange rates.  Better keep one eye open, as the Dow closes….

     

    This blog does not constitute legal advice.  You should not act or rely on information on this web site without first seeking the counsel of an attorney.

    © Copyright 2019 - Datex Corporation. All rights reserved.

    Pin It on Pinterest

    Share This
    X