Alternative sources of supply
Shifting the procurement of your products or components that you currently import from China to another country may seem like the most obvious tariff mitigation strategy. However, it’s still worth mentioning here, especially in relation to the “substantial transformation” test that was covered in the previous section.
For example, if you choose to source your components for assembly or product modification in Canada from countries that have free trade agreements (FTAs) with the U.S. or Canada, this can help you take advantage of the preferential tariff or duty-free treatment under these FTAs given that the imported parts or semi-assembled components meet the rule of origin requirement under the applicable FTA. In either case, it should at least help you avoid the scrutiny of the substantial transformation test that the U.S. Customs and Border Protection (CBP) has being applying for the purpose of Section 301 tariffs.
Here are some other practical tips:
- Rule of three: Depending on the breadth of your company’s supply chain, does your business have three other viable suppliers in their registry? Connect with these companies, ask for pricing and talk to them about how they’re prepared to sell into your market and on what turnaround deadlines and terms.
- Consider or reconsider local suppliers that can’t compete on price, but may be able to offer more stable supply at predictable pricing.
- Maintain a supplier network: Maintaining and mobilizing this network of relationships, when needed, can be a competitive advantage if done systematically and supported by the right management systems.
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If your goods are still considered of Chinese origin for the purpose of Section 301 tariffs, a bonded warehouse in the U.S. could help delay paying high duties. In fact, this tariff mitigation technique can be used not only in relation to Section 301 tariffs, but all tariffs in general.
The idea behind a bonded warehouse strategy is that the goods are stored in a bonded warehouse specified by the U.S. customs and the tariffs are still due, but their payment can be delayed. The duty has to be paid only when the goods are released from the warehouse for sale in the U.S., not when goods are imported. Instead of paying the full amount of duty on your imported inventory upfront, you pay them gradually at the rate of duty imposed on the date of withdrawal for consumption. Since the U.S. trade policy keeps changing, it can also happen that Section 301 tariffs are reduced or lifted in the near future while your goods are still stored in a bonded warehouse, and therefore you’ll only pay the duty rate in place on the day the products are discharged from the warehouse.
This CBP’s page explains how to establish a bonded warehouse in the U.S., different classes of customs’ bonded warehouses, as well as regulations for entry, storage and release from a bonded warehouse.
If you’re a Canadian company that has an assembly or a manufacturing facility in the U.S. for further distribution in the U.S. and re-exports, and a significant portion of your assembly parts come from China, you may consider switching your operations to a free trade zone in the U.S. since imports from China will most likely be affected by high U.S. tariffs.
Free trade zones are similar to bonded warehouses. Any operations in them, not otherwise prohibited by law, including storage, exhibition, assembly, manufacturing, and processing, are free from duties and taxes. In the United States, the usual formal customs entry procedures and payments of duties aren’t required on the foreign merchandise unless and until it’s released from a free trade zone for domestic consumption, at which point the importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product. Merchandise may remain in a zone indefinitely, whether or not subject to duty. Exports from the zone are free of duty and excise tax.
The imposition of Section 301 tariffs on nearly $500 billion worth of articles from China created substantial financial and compliance challenges, not only for American companies, but also for Canadian companies with business ties to either the U.S. or China. Careful analysis of existing and potential supply chains and suggested tariff mitigation strategies can help understand how these mitigation techniques could be implemented into a company’s sourcing and manufacturing operations to lessen the impact of Section 301 duties.