In today's interconnected global economy, businesses face the challenge of navigating complex tariff regulations that can significantly impact their operations and overall profitability. This challenge is likely to increase in the current political climate, where the Trump administration has indicated it intends to wield tariffs more frequently as a tool of foreign policy.
A thorough understanding of a company's exposure to tariffs is essential not only for importers but also for manufacturers and retailers.
Here are six critical questions to consider when assessing a company's tariff obligations and minimizing financial exposure:
1. Is the Company an Importer of Record?
A key initial question is whether the company is the official importer of record (IOR) on import documentation submitted to the U.S. Customs and Border Protection (CBP). If so, CBP will pursue the business for any tariffs owed on the imported items. That can include base tariffs and fees, as well as a variety of special Section 301, Section 232, or anti-dumping tariffs. Many companies buy goods, components, or materials that are manufactured abroad, but that does not always mean they are the importer of record. If a company purchases goods from a U.S. distributor or agent of a foreign supplier, the supply agreements and documentation should be reviewed to understand whether the company or another party has the legal obligation to pay tariffs.
2. What Country Are the Goods Bought From?
The country of origin is a key factor in determining whether a company has tariff obligations, what the tariff rates might be, and the compliance requirements. Factors such as trade agreements, diplomatic relations, and geopolitical circumstances can greatly influence the tariff structures imposed on imported goods. For instance, the United States-Mexico-Canada Agreement (USMCA) affords preferential treatment for items sourced from its member countries, encouraging trade among these nations.
Conversely, products imported from countries like China may be subject to higher tariffs due to certain country-specific tariffs. However, trade agreements and country-specific rates can undergo significant changes based on political dynamics. For example, the current administration has said it intends to impose tariffs on Mexico and Canada despite the presence of the USMCA.
3. Where Are the Goods Manufactured? Is There Transshipping Involved?
The manufacturing location and any transshipment practices associated with your goods can attract closer scrutiny from customs authorities. Trade preferences available under the USMCA and other free trade agreements only apply to goods that qualify due to substantial manufacturing in those countries under a complicated "tariff shift" analysis. A good made in another country that is shipped through Canada or Mexico would not receive such preferential treatment. Transshipping involves routing goods through intermediary countries to disguise their actual origin, a practice that can incur severe penalties if not disclosed correctly. Recent developments in U.S. trade policies have focused on combating such tactics, particularly with respect to countries known for circumventing tariffs. It is vital to conduct thorough supply chain due diligence to ensure that the supply chain is fully understood and that all necessary documentation is in order. This proactive approach can help avoid costly compliance violations and better prepare a company in the event of customs examinations.
4. What Is the Tariff Schedule for the Goods?
The Harmonized Tariff Schedule (HTS) serves as the classification system for goods entering the U.S. and establishes the applicable duty rates. Accurate classification of your goods' HTS codes is paramount since misclassification can lead to substantial fines, penalties, and shipment delays, directly affecting your bottom line. Recent developments in U.S. trade policy, including the potential introduction of global supplemental tariffs to address the perceived imbalance of international trade, make it critical for businesses to consistently assess their tariff classifications in light of possible rate fluctuations.
5. What Are the Terms of the Supply Agreements?
Clearly defined supply agreements are essential, particularly concerning how tariff costs are distributed between buyers and suppliers. With the volatility of current tariff policies, businesses must carefully evaluate their agreements to ensure they allow for flexibility in pricing adjustments and clarity regarding who bears the responsibility for increasing costs. A well-structured contract can serve as a vital tool for risk mitigation, protecting financial interests in unpredictable market conditions. While many companies have long-standing historical supply agreements, now is a good time to review those agreements to determine if material terms need to be amended or renegotiated in light of the current international trade environment.
6. Can a Tariff Surcharge Be Included on the Goods?
With the prospect of rising tariffs, businesses may find it necessary to consider passing some or all of these increased costs onto the purchasers of their goods. One potential option for such a change could be the use of tariff surcharges. However, implementing such a surcharge requires careful analysis of existing contracts, market competitiveness, legal compliance, and the potential impact on customer relationships. Businesses that may be impacted by the volatility in the tariff regime should begin this analysis now so that they are positioned to execute their changes quickly in the event of market disruption.
Conclusion
Addressing these critical questions can help businesses proactively manage tariff-related challenges, enhance operational efficiency, and safeguard profitability in an evolving global marketplace. Taft is equipped to help companies address these questions and help navigate the ever-changing tariff environment. Taft's International Trade attorneys provide nuanced analysis and guidance on country-specific obligations, HTS classifications, supply agreements, and more. Together, Taft can help ensure businesses minimize costs and supply chain disruptions resulting from the current volatility of international tariffs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
