Tariff Engineering: A Guide to Reducing Duty Rates
In times of trade wars and economic uncertainty, importers contend with fluctuating tariff rates. If duties increase, it’s important to have strategies and resources in place to respond. One possible solution to the problem is a strategy known as tariff engineering.
What is Tariff Engineering?
Essentially, tariff engineering is a legitimate restructuring or reclassification of a good to achieve the most favorable duty rate. It can be as simple as reclassifying a “doll” as a “toy” or as creative as adding felt to the bottom of a shoe.
Every physical imported item is assigned a 10-digit code from the Harmonized Tariff Schedule (HTS). The HTS code tied to a product will determine its duty rate. By working closely with an experienced customs broker, importers can identify opportunities for tariff engineering. Ideally, consulting an expert early in the process, such as the product design stage, helps by considering customs classifications when changes are easier to make.
- In the late 1800s, molasses was used to tint sugar, giving the appearance that it is a lower grade and subject to lower duties because the tariff code was color based.
- In the 1912 case of U.S. v. Citroen, pearls were unstrung from a necklace and placed in a natural state, later to be strung on the necklace again. This procedure changed the duty rate from 60% to 10%.
- Ford Motor Company imports the Transit Connect as a passenger van, only to remove the back seats and add a solid panel over the window once it clears customs. Importing it as a passenger van, which has a significantly lower duty rate than a cargo van, and modifying it after it clears customs has saved them millions in duties.
The applicable duty rate may depend on the product’s country of origin. You can change your country of origin if part of your process performed in another country results in a substantial transformation of your good. This is more commonly known as operational engineering.
Partnering with an experienced freight forwarder/broker will help you explore a tariff engineering strategy, potentially saving you on your duties and thereby, your landed cost. For more information about the Harmonized Tariff Schedule and tariff engineering click here.