Navigating Trade Compliance Amid Tariff Changes: Mitigating Risks and Understanding Revenue Impacts

Introduction

Recent Executive Orders and policy changes have significantly altered the global trade landscape, introducing reciprocal tariffs on countries that impose duties on U.S. goods. These changes impact multiple industries, requiring Trade Compliance leaders to assess potential risks and opportunities.

A structured approach is necessary to navigate these complexities, with a focus on regulatory compliance and cost management. This white paper examines key strategies for mitigating risks associated with tariff changes while exploring methods for optimizing trade-related costs.

Impact of Recent Tariff Changes on Countries and Industries

The implementation of reciprocal tariffs affects various countries and industries differently:

• European Union (EU): The EU imposes a 10% tariff on imported cars, while the U.S. previously imposed a 2.5% tariff on EU cars. The new tariff adjustments may influence the automotive supply chain and pricing strategies.
• Brazil: The U.S. tariff on ethanol is 2.5%, whereas Brazil applies an 18% tariff on U.S. ethanol exports. These disparities affect trade balances and market access for ethanol producers.
• India: India’s average applied Most Favored Nation (MFN) tariff on agricultural goods is 39%, compared to the U.S. average of 5%. Additionally, India charges a 100% tariff on U.S. motorcycles, while the U.S. imposes a 2.4% tariff on Indian motorcycles, impacting the agricultural and automotive industries.
• Canada and Mexico: Possible increased tariffs on imports from these countries impact industries such as automotive, agriculture, and energy, affecting supply chains and cost structures.
• China: A 10% additional tariff on Chinese imports has implications for electronics, machinery, and consumer goods, prompting businesses to assess sourcing strategies.

Companies must analyze these tariff adjustments in the context of their global operations to ensure compliance and minimize financial exposure.

Risk Mitigation Strategies

HTS Classification Reviews

• Conduct periodic audits of Harmonized Tariff Schedule (HTS) classifications.
• Ensure product descriptions align with current regulations to prevent misclassifications and related penalties.
• Utilize trade data analysis to identify potential risks related to tariff shifts and product classifications.

Regulatory Compliance Check

• Assess import/export licensing requirements.
• Evaluate compliance with sanctions, embargoes, and restricted party screenings.
• Align trade practices with country-specific regulations to minimize operational disruptions.
• Develop a framework for continuous monitoring of regulatory updates and trade agreements.

Valuation Considerations in Light of Tariff Changes

• Ensure that the invoice value accurately reflects the dutiable value of goods.
• Review the methods used to determine transaction value, particularly for goods crossing the southern border.
• Assess whether freight costs have been properly categorized between dutiable and non-dutiable expenses.
• Educate importers on the importance of correct valuation, especially as new tariffs make this distinction more financially significant.
• Conduct internal audits and reviews to ensure valuation compliance and avoid potential penalties.

Utilization of Free Trade Agreements (FTAs)

• Identify applicable FTAs to leverage reduced duty rates.
• Ensure proper documentation and origin verification.
• Verify compliance with rules of origin for trade benefits.
• Establish internal protocols for auditing FTA compliance to avoid potential penalties.

Supply Chain Security & Trade Compliance

• Assess risks associated with suppliers and third-party vendors in impacted countries.
• Implement best practices to minimize non-compliance risks.
• Conduct internal training on updated trade regulations and security protocols.
• Strengthen supplier vetting and contract terms to ensure alignment with evolving trade policies.

Revenue Optimization Considerations

Foreign Trade Zones (FTZs) & Bonded Warehouses

• Evaluate FTZ benefits for duty deferral and tax advantages.
• Assess compliance requirements for FTZ utilization.
• Consider bonded warehouses to manage tariff costs effectively.
• Explore opportunities to consolidate shipments and optimize storage costs within FTZs.

Duty Drawback Programs

• Identify eligibility for duty refunds on exported goods.
• Optimize record-keeping for long-term refund potential.
• Streamline the filing process for efficient duty recovery.
• Leverage technology solutions to track and manage duty drawback claims more effectively.

New Market Identification & Trade Agreement Opportunities

• Explore alternative markets with favorable trade conditions.
• Assess country-specific import/export regulations to refine market entry strategies.
• Leverage trade agreements to optimize cost structures.
• Develop diversification strategies to mitigate reliance on markets with high tariff exposure.

Tariff Engineering & Cost Reduction Strategies

• Analyze product modifications that may reduce tariff exposure.
• Identify alternative sourcing opportunities.
• Optimize valuation strategies within legal parameters.
• Collaborate with R&D and product development teams to redesign products for preferential tariff treatment.

Conclusion

Trade Compliance leaders must proactively assess the impact of tariff changes and implement strategies to ensure regulatory adherence while managing costs effectively. By conducting comprehensive risk assessments and exploring cost optimization measures, organizations can navigate the evolving trade environment with greater certainty and efficiency. Implementing a proactive compliance framework and leveraging trade facilitation programs can help businesses mitigate risks while maximizing operational efficiency and cost savings.

Given the current discussions on valuation and anticipated tariff changes, it is crucial for importers to review their valuation methodologies and ensure full compliance. Companies should take immediate action to assess dutiable values, particularly in relation to freight costs and the use of trade agreements like USMCA. A detailed review now could prevent significant financial impacts in the near future.