Exploring Tariff Avoidance Logistics

2018’s headlines signalled a slew of trade disputes involving the U.S. and its trading partners including Canada, China, India, Mexico, Russia and more.

With so many disputes in place, there was no possible way to fully prepare the logistics and supply chain industries for the full impact of added tariffs. But if there’s one positive result of tough times, it’s an industry’s motivation to think outside of the box and consider new possibilities for lessening tariffs.

During the past year, several multinational companies and law offices have identified different ways to bypass potential restrictions. Canadian Alliance has explored some of these options to highlight their creative ideas.

Rerouting Production Direction Around Tariff Borders

In 2018 a Chinese company avoided tariffs by rerouting the direction of its traffic container through Malaysia instead of straight across the Pacific to America as it usually would.

The New York Times covered this story, explaining:

“When those Chinese products arrive at an American port, they will look as if they had come from Malaysia, according to the company, and will be spared tariffs aimed at Chinese goods.”

On its website, Settle Logistics replied “For those unfair trade barriers targeting our industries from certain countries…we can adopt other approaches to bypass those trade tariffs in order to expand markets”.

Seek Remissions for Surtax Paid Through Duty-Relief Programs

As the trade war grinds onward, there is the potential for concessions from the Canadian government. The Canadian Department of Finance has outlined their remission request process on the GoC site here. Osler – a business law firm practising internationally from offices in Canada and in New York – are advising clients that:

“Avenues for seeking relief should be explored to determine if the surtaxes can be refunded through existing drawback and other duties relief programs … there may be instances where grounds for special consideration may allow for relief to be provided by the Canadian government. Experienced external counsel should be retained to assist in making submissions to the Canadian government to seek exclusions for products from the final list or to obtain a remission for the surtaxes paid.”

Searching for Legal Distinctions in Tariff Classifications

Previously, many companies did not carefully classify their products as they benefited from a blanketed NAFTA exemption on their products. With the tariffs of 2018, business should seek to identify their tariffed items to determine the exact classifications, some of which are exempt. Osler Law shares that “Our experience has been that, in many cases, importers claiming NAFTA treatment have been indifferent to the correct tariff classification of their products on the basis that the products were treated as duty-free regardless of the tariff item used for the import declaration.”.

Some companies have been flexing their creative muscles by actually making tiny changes to their products. Just by legally altering a small part of their design, they may be eligible to place their product in a category with less-costly duties. This method, according to Transport Topic News, is called “tariff engineering”.

It can be beneficial to look at your product and consider its different parts.  As an example, according to this STR Trade report “Turbine generators are typically imported into the U.S. as large unassembled structures consisting of the turbine and generation components and, as such, will now likely fall prey to an additional 25% tariff. However, if the components are imported separately they would fall into an entirely different tariff provision that is currently excluded from that tariff increase.”.

Using U.S. Bonded Warehouses to Store Tariff Subjected Goods

A creative method to cope with tariffs is to employ bonded warehouses if your product is being manufactured in the United States.  They are controlled by customs and can allow for you to store goods until the duty owed is paid.

According to this Bloomberg article,

“Firms can make and store products in “customs-bonded” warehouses for up to five years. Duties are only applied once products leave the facility for consumption. Companies can apply to U.S. Customs for a license to operate a warehouse”.

These bonded warehouses don’t just provide the equivalent of a minimal  discount to importers, either. As an example, Chinese importers could bypass the 45% tariff on their products using this method, providing very significant savings to the importer’s bottom line.

Free Trade Zones

Free Trade Zones (FTZ) have become a topic of interest to many companies throughout the recent tariff increases. FTZ are comprised of an isolated geographical area close to a port of entry such as an airport where foreign goods can be immediately unloaded for transshipment, altered, repacked and more without the imposition of import duties. In the US, they are generally called Foreign-Trade-Zones.

One of these Foreign Trade Zones is located at a North Florida Warehouse which markets its benefits clearly on its own website stating that companies can “Defer customs duties and taxes until merchandise is transferred from the FTZ to domestic market” and that you can “manage cash flow, operate more efficiently and receive duty exemptions on re-exports while also streamlining the customs clearance process. When you choose FTZ No. 64 site 17, you gain these benefits and many more on your imports and exports.

According to BNN Bloomberg, these zones were created under “a federal program that was launched in 1934, to help American companies shield themselves from the global trade war that followed the sweeping tariffs enacted by the Smoot-Hawley Tariff Act”. With 2018’s tariff war, “Companies are awakening to the idea of using trade zones to help mitigate the impact of tariffs, according to trade consultants and customs brokers”.

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Tariffs continue to present many challenges to supply chain operations and logistics. And in this world of lofty fees, some innovative thinking can pay off with quality research, communication and cooperation. Industry leaders can help refine their supply chain operations despite pressure of tariffs by considering innovative options such as product reclassification, bonded warehouses, considering various countries for shipment and much more.

2018-12-17T12:13:05+00:00December 5th, 2018|