In Times of Trade War, Companies get creative to avoid tariffs

“We haven’t seen anything like this most of our careers,” said Marianne Rowden, president of the American Association of Exporters and Importers in Washington. “Since the Reagan administration, we’ve had trade liberalization pretty much uninterrupted, except maybe during the financial crisis.”

Trump wants companies to build more factories in America, which he says has been battered by the unfair trade practices of countries such as China. Some firms warn the tariffs may have the opposite effect, forcing them to move manufacturing offshore. Harley-Davidson Inc. said it would shift production outside the U.S. in response to European retaliation against the president’s steel and aluminum tariffs.

But overhauling supply chains is a costly decision that can take years to execute. In the short term, companies are looking for ways to get around paying the duties.

Take foreign-trade zones. The federal program 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. Since then, about 200 zones have popped up across the country, with $610 billion in shipments passing through them, according to the U.S. Foreign-Trade Zones Board’s last publicly available report to Congress.

In the case of United Chemi-Con, altering the activated area of the trade zone in North Carolina cost the firm about $20,000, Katz said. The move allows the company to import duty free the aluminum foil it uses to make capacitors, as long as they are exported from the zone. The company, with 150 employees in Lansing and 50 elsewhere in the U.S., is a unit of Nippon Chemi-Con Corp. in Japan.

Companies are awakening to the idea of using trade zones to help mitigate the impact of tariffs, according to trade consultants and customs brokers.

Greg Jones, vice president of FTZ Corp., an Alabama-based consulting firm and provider of trade-zone management software, said during the past three months U.S-based manufacturers and state and local officials have asked whether the U.S. Foreign-Trade Zones program can “help them avoid the negative consequences of the new punitive tariffs.”

Bonded warehouses are another option. Firms can store and make 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.

Such facilities can help firms save in the short run, delaying duties until a product is actually shipped to consumers, said Bernie Hart, a vice president at customs brokerage Livingston International.

Time, Money

“From a time-value-of-money perspective and cash-flow perspective, it saves significantly,” Hart said.

“Tariff engineering” is also making a comeback. Companies can tweak their design process to reclassify a product under a lower-duty category. The term dates back to the 19th century, when an importer colored sugar with molasses to avoid higher duties, according to a paper by law firm Barnes, Richardson & Colburn. But importers have to be careful not to take the tactic too far, since U.S. Customs tends to reject applications when companies appear to be making a “fictional or temporary product,” according to the law firm.

“If people are going to get hit by a 25% duty, they’re going to look more closely at their manufacturing of products and their engineering,” said Amy Magnus, a compliance director at A.N. Deringer, a customs brokerage.