As **tariffs continue to escalate import costs**, more brands are turning to an innovative and legal strategy known as **tariff engineering**. This approach not only softens the financial impact of rising costs but also allows companies to adapt to a complex tariff landscape.
Understanding Tariff Engineering: A Strategic Tool
What is Tariff Engineering?
At its essence, tariff engineering involves modifying a product’s characteristics to qualify for a lower tariff classification or evade additional duties altogether. This might include subtle changes such as swapping materials, altering dimensions, or even adding features that can lead to a different classification. Companies might even relabel products to fall under categories with lower tariffs. With over 5,000 product classification codes utilized by various countries for tariff assessments, even minor adjustments can yield significant cost savings.
The Implications of Product Classification
For instance, different categories of jackets can incur vastly different tariffs based on their components, such as zippers or fabric types. While one type may attract a higher duty, a nearly identical product without those features might qualify for significantly lower tariffs. In an environment where the Trump administration imposed broad-based tariffs, including a universal 10% tariff, understanding and leveraging these distinctions through tariff engineering is becoming increasingly crucial for brands.
Rising Adoption and Interest in Tariff Engineering
The Increasing Demand for Cost-Effective Solutions
Interest in tariff engineering has surged, especially among companies importing from countries like China, which face some of the steepest tariffs. Mario Torrico, a seasoned attorney specializing in international trade, has noted a 50% increase in inquiries regarding tariff engineering since January. “Brands are asking, ‘How can we modify our product? What are the potential risks?’,” he explains, illustrating that many companies are exploring all options within their toolkits to mitigate tariff impacts.
A Fresh Wave of Brands Innovating
Historical Context and Current Examples
Tariff engineering isn’t a novel tactic; it has been strategically applied by iconic brands like Columbia Sportswear and Converse. Columbia, for instance, designed shirts with small zippered pockets to lower duty rates, while Converse modified its All Star sneakers to include felt in the sole, reclassifying them as slippers — a category with a mere 6% tax, versus 20% for sneakers.
Today, giants like Walmart are following suit, actively collaborating with suppliers to replace high-tariff commodities like aluminum with alternatives such as fiberglass. As CEO Doug McMillon remarked, their team has been “impressive in identifying opportunities and adapting.”
Success Stories from Startups
Startups are also harnessing tariff engineering. Portless, a cross-border startup, highlights an apparel client that successfully reduced duties by over 15% by switching from synthetic blends to cotton, resulting in cost efficiencies. Another company reclassified garbage can imports by integrating sensors, shifting classification from metal products to mechanical devices, thereby incurring lower duties.
Even industry titans like Coca-Cola are stepping into the ring, with CEO James Quincey hinting at a transition from aluminum cans to plastic bottles to circumvent rising tariff costs. As Patrick Penfield, a professor from Syracuse University, notes, this is a clear demonstration of how companies are strategically using design choices to comply with regulations while reducing expenses.
Navigating Risks and Gray Areas
Understanding the Dangers of Tariff Engineering
While tariff engineering presents significant advantages, there are notable risks. For example, Ford faced scrutiny after importing vans with added rear seats, only to remove them post-import to evade a 25% duty on cargo vehicles. Following investigations, Ford agreed to pay $365 million in fines for alleged misclassification.
Legal and Ethical Considerations
Torrico cautions that any motive behind product changes should be well-documented, emphasizing that the intent behind modifications should align with permissible tariff engineering practices. However, not every company can leverage these strategies, especially smaller firms that lack the necessary resources.
The Complex Landscape of Manufacturing
As companies seek solutions beyond tariffs, many are moving operations away from China to countries such as Vietnam, India, or Sri Lanka. Others are resorting to bonded warehouses to defer tariffs, waiting for favorable rate changes before paying duties on their imports.
Conclusion: The Math Behind Cost Management
Despite the complexities surrounding tariff engineering, it’s becoming an essential lever for brands looking to manage their costs effectively. As Penfield succinctly puts it, “At the end of the day, it’s just math. You need to evaluate where the lowest-cost opportunities lie considering materials, processes, labor, and tariffs.” As brands adapt to the ever-changing landscape, tariff engineering will remain a vital strategy in controlling expenses while navigating the challenges posed by tariffs and international trade.
