Countries adding tariffs to imported goods isn’t anything new. In some form or another, they've existed for hundreds of years. As a result, manufacturers that import materials, components, and finished goods have developed a range of legally accepted ways to minimize their exposure to tariffs. One of them is tariff engineering.
What Is Tariff Engineering?
Tariff engineering happens when manufacturers change an element of production so they can reduce the tariffs they need to pay. This often happens in one of three ways: changing the materials or components they use to make a product, altering their assembly process, or reclassifying those imported products to lower-duty categories. We explain in more detail below.
Tariff Engineering Explained
The first stage of tariff engineering is for a manufacturer to analyze which elements of its supply chain are subject to the highest rates. It could prove more cost-effective to focus on finding ways to mitigate, say, a 25% tariff than a 10% one. Once the targeted products have been established, tariff engineering can begin.
If a manufacturer can lower the tariffs it has to pay by adjusting a component or where it’s sourced from—for example, changing a sneaker’s upper to canvas from leather, or buying from a supplier based somewhere with lower or no tariffs—it can choose that route.
The adjustment should maintain the existing quality of the finished product and mustn’t be reversible upon import. The latter point is important, as trying to get around tariffs in this way can prove costly. Auto manufacturers in the US once tried to circumvent the country’s high tariff on light trucks by adding back seats to the vehicles before importing them, to get them into the US at the lower passenger-vehicle rate, only to remove the seats upon delivery. The authorities caught on to the loophole and closed it, fining the companies involved.
Another form of tariff engineering involves when and where manufacturers finish the assembly of their products. Depending on the type, importing components and then putting them together in the country where they will be sold can attract a lower rate than simply importing the finished product. Workers in the import country will be required to assemble the components, which leans into the domestic job protection aspect of tariffs.
It's also possible to reduce the tariff rate without changing manufacturing processes. All products—raw materials, components, and finished goods—have a classification dictated by the World Customs Organization’s Harmonized Tariff System (HTS). It’s from this classification that a tariff rate is determined. Companies can’t just choose whichever classification will incur the lowest tariff rate, as they need to be accurate, but this coding can still play into their hands.
If a manufacturer has changed an aspect of its product, but not checked to see if this change alters the HTS code, it could find that the change works in its favor. For example, say a clothing maker found a more affordable cotton supplier and started including a higher percentage of that material in its cotton-poly shirts. Because the HTS code then changes for those shirts, the manufacturer may incur a lower duty rate than for the previous polyester-dominated blend.
Whether tariffs are making the headlines or not, tariff engineering should be a consideration for production managers. As another weapon in the supply chain management arsenal, the practice can help to reduce costs and increase profitability—benefits that will always be relevant.
#1 Cloud
Planning Software
