Impending Tariff Hikes Leave Companies With Few Escape Hatches

Companies hunting for avenues to soften the blow of threatened higher tariffs next month don’t have great options.

Some are ordering inventory early and trying to time shipments. Others are finessing how they classify products based on where they’re made, what they are and what they’re worth. And their plight has been aggravated by the Trump administration’s reluctance to dole out exemptions and its eagerness to crack down on customs fraud.

That’s leaving companies with little recourse to avoid the higher import taxes Trump has promised will hit them within a few weeks. Industries including retail and chemical distribution are finding only marginal benefits from those strategies, trade groups and attorneys said.

“There is generally not a, ‘Oh, this is the solution for all of your problems,’” said Andrew McAllister, co-leader of the customs and products importation team at Holland & Knight. “They’re trying to trim around the edges on doing things in a compliant way that’s going to reduce the value” of imported products.

President Donald Trump said earlier this month that a temporary 10% universal tariff would be replaced Aug. 1 by higher rates on many countries.

At the same time, his administration has been trying to negotiate bilateral trade agreements that could lower rates.

“Hope is not a business strategy, but it is one everybody’s leaning on,” Eric Byer, president and CEO at the Alliance for Chemical Distribution, said of his members. The organization comprises many small businesses that are being particularly hard-hit by the tariffs, and they are counting on the trade deals to lead to lower rates, Byer said.

Stocking Inventory

The first goal of importers before the Aug. 1 tariff hike is to get inventory to the US “as quickly as possible,” McAllister said.

Some retailers began front-loading inventory early this year, anticipating that Trump would quickly move to impose tariffs, said Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation. That strategy works better for basic items like underwear and socks, he said, than for seasonal or trend-focused fashion items.

In the sports equipment industry, companies typically stock up toward the end of the year, said Todd Smith, president and CEO for the Sports & Fitness Industry Association. That means the industry was largely shielded from the brunt of the tariffs earlier this year, as companies had excess supply and didn’t need to import at first.

“Any of that excess supply is definitely gone” now, he said, and prices are starting to go up for consumers.

Pre-buying, storing, and inventorying product is also a key concern for the manufacturers of vehicles like dump trucks, snowplows, and ambulances, said Mike Kastner, senior vice president of the Work Truck Association, known as NTEA.

“It goes from small companies looking at the little widgets to OEMs bringing in fully made chassis from Europe or Asia,” Kastner said, referring to original equipment manufacturers. “That gets you three to six months, and it’s a lot of money to tie up if you’re used to just every 30 days sending a payment to your supplier. And I think everyone who’s doing that recognizes it as a temporary insurance policy.”

Some companies have looked for speedier alternatives to transporting inventory from Asia by sea—usually the most economical option. Air is faster, but also more expensive. And air shipping might work for something relatively small and light, but isn’t feasible for heavy items like furniture, Gold said.

Meanwhile, importers scrambling to adjust shipments to the stop-start nature of Trump’s tariff policies have created unusual logistical snarls, Byer said.

Some small chemical distributors are having trouble getting space for their products when they compete with large retailers—whose products are also more stable and easier to transport, he said.

Country of Origin

Companies are also looking for small savings by examining the characterization, valuation, and origin of the products they import.

If a manufacturing step performed in one country substantially transforms a product, customs rules might determine it originated there. The White House is trying to strike trade deals that could bring new rules of origin, following the model of some other past trade agreements.

In the meantime, companies are seeing if they can move the key, “substantial transformation” step of a manufacturing process to more favorable jurisdictions, including the US.

They have to act carefully when changing their supply chains. The administration has also been threatening a crackdown on transshipment, or routing imports through other countries.T

Classification and Valuation

Imports are tariffed according to definitions in the Harmonized Tariff Schedule of the US. But the answer isn’t always clear-cut.

In addition to the country rates, businesses face industry-specific tariffs on items like steel and aluminum.

“Companies are really diving down into proper classification of their products” to ensure they’re not paying more than they need to, said Angela Gamalski, a partner at Honigman LLP.

Customs enforcement officials will become suspicious, however, if an importer suddenly changes how they’re classifying their goods, so companies should tread carefully, said Luis Arandia, a partner at Barnes & Thornburg LLP.

Companies can also look for savings in the valuation of their products. For example, a concept called first sale valuation subtracts markups from middleman transactions and values the product at its original selling price.

Lawyers are advising companies deploying any of these strategies to be wary of enforcement risks—particularly the possibility of False Claims Act violations, which carry punishing penalties.

“The overall tariff rate right now is the highest we’ve seen in modern history,” Arandia said. “So there’s a lot of room for potential evasion.”