Firms Looking to Mitigate Tariffs Can Use These Four Strategies

Businesses are working to manage cost exposure as they face the sharpest shift in US tariff policy in years, and they’re using four distinct strategies to manage this uncertainty: eliminate, refund, delay, and reduce.

A PwC analysis published last month estimates total US tariff exposure could jump from $76 billion to nearly $989 billion annually. This represents a 13-fold increase if current proposals are fully enacted—and a direct cost to companies importing into the US.

Eliminate the Impact

The most straightforward strategy to explain, and the hardest to effectuate, is to move production or sourcing to a country without tariffs or manufacture domestically within the US.

Are companies talking about it? Of course. Are they acting on it? Unless there was already a business imperative to do so, it’s unlikely to happen without more clarity.

There are few options for companies that don’t involve at least a 10% baseline tariff, and that’s not even considering potential reciprocal tariffs that may come back into play. The amount of uncertainty in the current environment means the investment in time, money, and resources to entirely shift a business footprint may not be worth it—yet. That makes the other three options more likely for most companies.

Get a Refund

Companies can capitalize on an opportunity known as “duty drawback,” which allows them to obtain up to a 99% refund on tariffs for imported products, provided they have a qualified export that can be matched within a five-year period.

Think of duty drawback as similar to a tax refund. You pay the government duties up front, and if you meet certain eligibility rules—such as exporting the exact or substitutable goods or destroying them—you can claim back most of the duties you paid. For qualifying shipments, that refund can be up to 99% of the original duties.

But it’s complicated because that duty drawback is eligible only for certain tariffs. Depending on which tariffs your company is navigating, duty drawback may not be an option. This strategy is also very technical and requires significant diligence in understanding how and when it can be applied.

Delay the Tariffs

A foreign trade zone or bonded warehouse can be a powerful tool for companies with significant volumes moving through a US warehouse, distribution center, or manufacturing plant. This allows companies to bring the products in, delay payment of duties and fees until withdrawing them for consumption or negate them altogether by exporting them outside the US.

When a company admits raw materials into a foreign trade zone, manufactures a finished good, and then ships to a US customer, it doesn’t pay tariffs on the raw materials until the time of customer shipment. If it exports the finished good, the company can potentially avoid 100% of the tariffs as the raw materials are never cleared by customs.

Foreign trade zones take time to activate and require sophisticated inventory control systems, while bonded warehouses may be easier administratively but limit activities within the warehouse—there are pros and cons to each. But companies can enjoy substantial savings in the form of deferred duties as well as consolidation of other customs fees.

Reduce the Tariffs

Reducing the dutiable base for imports involves strategies such as evaluating transfer pricing, unbundling non-dutiable items from the declared value, or deploying first sale for export to use a customs value from an earlier sale.

Depending on a company’s circumstances, these options can be easier to identify and implement compared with the previous three strategies. All strategies are potentially stackable.

However, companies must look holistically at their exposure. If they aren’t bringing at least customs, tax, finance, logistics, sourcing and supply chain to the table, they’re prone to pull one strategic lever only to disrupt another.

Two examples would be unbundling a royalty to decrease your transfer price (and hence, your dutiable base) only to create potential tax consequence or modifying a supply chain to try and avoid tariffs, only to learn that the country of origin didn’t change and tariffs still apply. If the right teams aren’t involved in the discussion, there’s a risk of negating the intended benefits or potentially creating new vulnerabilities.

Looking Ahead

While the public may view the 90-day pause on certain reciprocal tariffs as relief from immediate financial effects, companies should stay focused on the potential impacts to their supply chains and bottom line.

Ensuring compliance while managing your tariff exposure to stay cost effective is the ultimate goal. Each of these options involves resources, investment, and effort.

This isn’t a “wait and see” moment—it’s a “plan and prepare” one that requires companies to acknowledge they may never have all the answers. But with the right people and decision-making processes in place, they can make smart, strategic choices in a constantly shifting landscape.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author information

Kristin Bohl is principal with PwC’s US Customs and international trade practice.

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