In 1881 American customs officials stopped a suspicious shipment of sugar, believing its colour had been deliberately altered. Under the prevailing tariff code, the darker the colour, the lower the grade and the lighter the levy. A chemical test confirmed the officials were correct. The case went all the way to the Supreme Court, which determined that the importer could in fact alter merchandise so as to lower the duty rate, and therefore had done nothing wrong.
Not a week goes by without new threats from Donald Trump to slap fresh duties on imports into America. Sweeping tariffs risk becoming “existential” for companies, says Edward Steiner of Sandler, Travis & Rosenberg, a law firm. For many, moving production to America—as Mr Trump would like—remains prohibitively expensive. Companies are therefore likely to explore more creative approaches instead.
Those hoping to dust off their playbooks from Mr Trump’s first term will probably be disappointed. Exemptions from duties, such as the one that Apple, maker of the iPhone, was granted in 2019, may be harder to get this time; Mr Trump has promised “no exceptions”. Likewise, moving production from China, on whose goods Mr Trump has imposed an additional 10% tariff, to places such as South-East Asia may not do much to shield firms from duties, particularly if Mr Trump follows through with his threat of applying reciprocal levies. Companies could move operations to Thailand or Malaysia but end up having the same conversations in 18 months, says Dave Townsend of Dorsey & Whitney, another law firm.
Some bosses may look instead at wily workarounds. One of these is known as “tariff engineering”, which includes tweaking products to change their official classification, as the sugar manufacturer did. Duties can vary significantly even when merchandise appears similar, and “therein lies the opportunity,” notes Lawrence Friedman of Barnes, Richardson & Colburn, one more law firm.
Companies may take inspiration from Converse, a footwear brand which over a decade ago altered the design of various models of its Chuck Taylor All Star shoes, which are imported from countries such as Vietnam, to change their classification. Simply by adding a layer of fabric on about half the insole, Converse was able to cut the duties it pays on the canvas trainers to as low as 7.5%, compared with tariffs of up to 48% for other footwear. Clothing manufacturers such as Columbia Sportswear have similarly added pockets below the waist on shirts, t-shirts and blouses to move them into a product category for which tariffs are lower.
Another form of tariff engineering involves fiddling with where a product ostensibly comes from. Consider the cable harnesses in Hyundai’s cars, made up of wires, plastic coverings and connectors. American customs officials have deemed these to be made in South Korea, where the carmaker hails from. Yet although the raw material is manufactured there, most of the production process happens in China, with the finished harness then sent back to South Korea for testing and packaging. Designing supply chains so that just enough production happens in a place that benefits from lower tariffs is cheaper than shifting manufacturing in its entirety, and allows firms to be more nimble when new levies come in.
Even if none of this is possible, there are other clever ways companies can lessen the burden of tariffs. The “first-sale” provision, created by a court ruling in 1988, allows importers to value goods based on the price charged by the manufacturer, rather than the higher ones charged by middlemen along the way. To preserve cash, companies can also delay the payment of duties. In a note sent to clients this month, Maersk, a shipping giant, advised using “bonded warehouses” that allow companies to store goods without paying duties until they are sold, as well as “temporary import bonds” for goods that are set to be re-exported.
Of course Mr Trump may eventually stop these manoeuvres, too. In 2008 America’s customs agency proposed scrapping the first-sale rule, though lawyers fended off the threat. Yet even if some loopholes are closed, companies are bound to find others. Ultimately, says a trade lawyer, “people want stuff, and they’ll get it one way or another.” Expect plenty of ingenuity in the years ahead. ■
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