Strategies for Reducing Tariff Costs
Mar 25, 2025
Background
There have been numerous discussions about tariffs in the news recently. In Trump’s first presidency tariffs for Chinese goods were added. In Trump’s second presidency, more tariffs for Chinese goods were added in addition to new tariffs for most Mexican and Canadian goods. To complement the country-based tariffs, tariffs for “iron and steel”, aluminum and auto categories have been added affecting imports from all countries worldwide. These tariffs increase product cost which therefore leads to reduced profits or increased pricing. In order to maintain profits and sales volumes, the impact of tariffs needs to be minimized.
Tariffs that have either been implemented or proposed will produce a US tariff revenue of $275B per year.
| Country | Tariff Revenue (billions) |
|---|---|
| China (CN) | $60.6 |
| Mexico (MX) | $98.0 |
| Canada (CA) | $81.1 |
| Iron and Steel (Excl. CN, MX and CA) | $3.9 |
| Aluminum (Excl. CN, MX and CA) | $0.8 |
| Auto (Excl. CN, MX and CA) | $30 |
| Total | $275 |
Table 1 – Tariff Revenue by Country
To illustrate how companies are impacted by tariffs, tariffs collected by the US CBP (US Customs and Border Protection Service) from companies that either produce or distribute products (42 million employees) is about $6500 per employee. Using this value per employee leads to an estimate for average annual tariffs for different sized companies as shown in Table 2 .
| No. Employees | Annual Tariffs (million) |
|---|---|
| 10 | $0.07 |
| 50 | $0.33 |
| 100 | $0.65 |
| 250 | $1.63 |
| 500 | $3.25 |
| 1000 | $6.50 |
| 1500 | $9.75 |
| 2000 | $13 |
| 5000 | $32.5 |
| 10000 | $65 |
| 100000 | $650 |
Table 2 – Average Tariffs by size of company (Actual tariffs will vary significantly by company)
A major goal of the tariffs is to reduce the import of goods and incentivize domestic manufacturers to produce items thus reducing the US trade deficit. Although this is the intended goal when tariffs are enacted, it is common for goods to continue to be imported due the large difference in labor costs between the US and most other countries (For further information on this topic see our lesson on “Procurement in Other Countries” in our “Manage Product Costs As A Team” course).
When reducing costs incurred by tariffs, it is important to act as soon as possible since tariffs can be added in a matter of days whereas the measures to reduce the impact of tariffs can take weeks to months to implement. New tariffs will also affect items currently being manufactured or in transit. Governments have a distinct advantage over importers regarding tariffs since all products being imported already require standard tariff codes to be added to all shipping documents and all that is needed for them is to change the tariff rate electronically in their system. For this reason, tariffs for steel and aluminum are already effective once they enter a US entry point, although tariffs for items in transit will be exempted for a short period after tariffs become effective.
Strategies for reducing the impact of tariffs can be broken into 2 categories:
- Tariff Recovery.
- Eliminating or modifying the trigger invoking a tariff.
Tariff Recovery
Exclusions
If you have paid tariffs, there are several justifications for tariff refunds:
- Tariff exclusions on which you have paid a tariff.
- Items which had incorrect harmonized tariff codes applied to them when entering the country.
- Duty drawback on re-exported items or for items that have been destroyed.
Tariff refunds need to be applied for as quickly as possible since refunds generally have an expiry date after which refunds are no longer available. In the US the mechanism for recovering tariffs is the ACE (Automated Commercial Environment) which is administered by the US Customs and Border Protection authority. The process entails identifying items by line item and then applying for the refund. The process does take time and requires resources from your team. The effort from your team can be reduced by using a service company specializing in tariff recovery. Other advantages of a service company include:
- Regular advice on the latest regulations.
- Identification of opportunities to claw back tariffs specific to your business.
- Assistance in optimally reclassifying your products.
It is advisable for most companies to use a service such as this since these companies stay current with the latest regulations although will charge a fee.
Refunds for Re-Exported Items
Another form of tariff recovery involves “duty drawback” which is triggered when you re-export items or when items have been destroyed . This applies to both components that make up a product and finished products. The recovery mechanism is very similar to tariff refunds but requires records for both the import and export or destruction of item. When imported items fail to meet quality standards and are returned to the supplier, this also qualifies as a re-export.
Destruction includes the scrapping of items due to:
- Quality issues occurring when the item was originally manufactured
- Errors in the processing of items after import.
- Damage to items in transit.
In the case of re-export or destruction of items, records for both the import and re-export/destruction are required to be able to apply for a drawback. When destroying items, an application will need to be filed with customs seven days prior to destruction to provide them with the option of observing the destruction.
Tariff Reduction and Elimination
To better understand how to reduce or eliminate tariffs, it is important to understand the actions that initiate or trigger the charging of a tariff.
These triggers include:
- Items entering a customs area.
- The country of origin.
- The tariff code assigned to the item. This trigger also accounts for category-based import tariffs such as the “iron and steel” and aluminum tariffs currently in place in the US.
Importing from Alternate Countries
When tariffs apply to imports of specific countries such as Mexico, Canada and China in the case of the US, the most effective means of reducing a particular tariff is to consider countries that have either a smaller or no tariff that have similar capabilities and pricing. This usually takes time unless you already have existing relationships with suppliers in countries that do not have tariffs applied to them. When making these switches a risk-to-reward calculation needs to be carried out to understand what the probability is that a particular tariff will stay in place and for how long and what the benefit is for changing to suppliers in another country. Cost differences such as conducting quality audits, transportation costs, price differences and tariffs need to be included in these calculations. When importing from China, consider Vietnam and India as comparable alternates. For more detail on sourcing from alternate countries, please review our lesson on “Procurement in Other Countries” in our “Manage Product Costs As A Team” course.
Alternatives to Re-Exporting
Even though tariffs related to re-export can be reclaimed, this process does take up the time of your employees and is likely to incur fees from a service provider helping you with drawing back these tariffs. It is common that companies do not apply for tariff refunds and tariffs therefore stay in government coffers.
Even though it takes longer to arrange, it is beneficial to evaluate whether goods can be shipped directly from the country of manufacture directly to your customer’s country. This will reduce transportation and handling costs, which will provide savings even when tariffs are revoked. In cases where you are only purchasing sub-assemblies or components, consider having your supplier or another supplier in the same country complete the product prior to exporting the product.
By using this mechanism, tariffs in the intermediary country are bypassed or eliminated completely.
Another approach to direct shipping would be the use of bonded warehouses or free trade zones. Many countries have free trade zones. The US has 197 free trade zones distributed across the whole country. Goods can be imported and re-exported from both these mechanisms without paying any tariffs and thus eliminating the need for reclaiming tariffs. Both approaches involve either setting up your storage facility or renting space in someone else’s facility, which will add cost. Bonded warehouses require dedicated security which will further add to cost. For a number of scenarios, it will be beneficial to use one of these approaches. It is, however, recommended that a study be performed with the help of someone familiar with a particular location’s rules and regulations to quantify the potential benefits.
Reducing Category-Based Tariffs
Category-based tariffs generally apply to raw materials and their derivative products. These tariffs can often be applied to all countries and therefore sourcing from another country is not available. The intent of these tariffs is to encourage the production of raw materials in the country that is imposing the tariffs. This process is not necessarily straightforward since it requires significant capital investments without a guarantee that tariffs will stay in place for 10-25 years or longer. Even though the labor costs of producing the raw items may be fairly insignificant due to heavy automation at foundries and mills, the labor for producing the final article is usually orders of magnitude larger than material cost and therefore if labor rates in a exporting country are 1/3 to a 1/4 of the country importing goods, it is often not cost effective to purchase raw materials into the country responsible for tariffs.
When importing derivative products, only the finished weight of the raw material will have a tariff applied to it. A category type tariff is not assessed against the total cost of the derivative product. Generally, operations such as milling, machining and cutting can significantly reduce the mass of the finished goods thus reduce the tariff by the difference between the mass of the incoming raw material and the finished item. In these cases, it is important to instruct your supplier to use the finished weight multiplied with the cost/weight of the incoming raw material on shipping/exportation documents.
Conclusion
With tariff regulations changing daily in the US, it is important to understand what the impacts of existing and new tariffs will have on the cost of your products in order to ensure you remain competitive. To reduce the impact of tariffs, the measures discussed above need to be evaluated to determine which path provides your products with the lowest cost. Your final decision will depend on:
- The location where products are being sold.
- The tariff regulations and rates for the country into which products are being imported.
- The countries which can supply you with the best overall value in producing your products.
- The speed at which tariffs change and how long they are effective.
- The time it takes to make changes to your supply chain to minimize the impact of tariffs.
As with many decisions made by companies, tradeoffs will need to be made to determine what is best for a particular time frame. Tariff regulations are dynamic and therefore vigilance is required to ensure adjustments are made in a proactive manner.
