|What midsize firms can learn from multinationals about avoiding tariffs
When US President Donald Trump announced on September 17, 2018, that the United States would be imposing tariffs of 10 percent (and eventually 25 percent come January 1, 2019) on $200 billion in Chinese imports, it hardly came as a shock to anyone who’s been keeping tabs on the US administration’s trade file.
Trump campaigned on a promise to take action against what he believes to be unfair trade practices, and take action he has. Despite protests from industry groups and warnings from economists that protectionist measures would cause far more harm than good, the president has remained steadfast in his resolve to punish adversaries and allies alike.
While industry groups lament the trade disputes and their disruption to business, there’s a remarkable amount of work being done behind the scenes among the United States’ largest businesses to minimize the impact of global trade disruption. However, the safeguards they are implementing aren’t exclusive to big business and are just as accessible and realistic for many medium-sized firms that import at high volumes, but many of them aren’t taking advantage to the same degree.
Here are some basic actions midsized businesses could take to limit additional cost and risk during the United States’ ongoing trade disputes.
Beat the clock
The US administration has been brilliantly transparent about its intentions to carry out specific trade actions. The US Trade Representative has provided extensive lists of proposed products or product categories to which tariffs will be applied well in advance of the date the tariffs are actually applied.
Those businesses that have been paying close attention to the affected products and countries of origin have been able to stockpile inventory prior to the date the tariffs took effect. This is no easy feat, given the capacity constraints on ocean freight vessels, but with the support of freight forwarders, many businesses have been able to get inventory stateside to avoid paying costly tariffs. While this tactic could have an adverse effect on warehousing costs, those costs are typically insignificant relative to the proposed tariffs and the potential for lost business due to price increases or lacking inventory.
In many cases, avoiding a tariff can be achieved by combining two products on which tariffs are applied into one new product that would fall into a different product classification. Of course, this requires a shift in production processes overseas. In some cases, new vors or suppliers may need to be sourced. But the effort could be well worth it for high-volume importers, particularly if the cost of the additional overseas production is dwarfed by the imposition of tariffs that could amount to as much as 25 percent of the total import value.
In some cases, businesses have been able to make only minor adjustments to an already existing product to avoid a product classification that falls under the tariff list, and the incremental cost has been negligible.
To be sure, there is nothing “simple” about these classification ations. Given the higher level of scrutiny being placed upon imports from China, changes to product design and associated classification have to be carefully documented with pinpoint precision to avoid noncompliance. In some cases, importers may need to notify Customs & Border Protection in advance that a change in composition has been made and how. This is where leveraging the support of customs brokers and consultants can really pay off as they can ensure the many reams of trade data are clean, accurate, up to date, and compliant.
Duty drawback and exceptions
Many businesses are unaware they can recover some or even much of their trade-related costs through the duty drawback process. There are a handsome number of product classifications for which duties can be recovered, even among the products affected by the Section 301 tariffs (China-origin goods). And while there is a cost in terms of time and resources to apply for duty drawback, the return could be quite substantial.
Similarly, businesses can apply to be excepted from tariffs if they can prove that domestic supply of the product is unavailable or that the imposition of tariffs would cause irrevocable damage to their business or industry. While the US government ts not to dole out exceptions liberally, some businesses have had successful applications, saving themselves a great deal of additional cost.
Companies often take a liberal approach to classification, particularly in cases when free trade agreements or free trade zones provide for duty-free trade across entire product categories. In some cases, the difference between two HS codes can appear so slight that a business may not necessarily be able to understand how to differentiate them. As a result, products may be imported under an incorrect classification.
Correcting these inaccuracies can provide valuable opportunities to importers affected by the imposition of tariffs. If a company has been innocently and unknowingly misclassifying certain products or product components, identifying those misclassifications and correcting them can not only help it to avoid tariffs or duties, it can help to avoid costly penalties in the event the business is audited.
New sourcing markets
It’s never easy to make modifications to a supply chain, but it can often be far more difficult for larger multinational companies that have configured their supply chains for just-in-time production processes. In this case, midsized firms may have an advantage over their larger competitors.
Identifying new suppliers and new sourcing markets can often be a daunting task, and many businesses understandably use it as a last resort. But finding new suppliers in new sourcing markets can be a great way of improving the viability of a supply chain. Once the trade dispute has passed, an importer can always return to their original supplier but will then have a viable backup in the event their supplier of choice cannot or will not be able to provide sufficient supply.
It’s worth the effort
Exploring some of these options can result in the realization of significant cost savings and the streamlining of customs processes. This not only serves to efficiencies but also provides for a clearer outlook on the overall supply chain and an opportunity to strategically improve it to meet a business’s future needs.
To be sure, this is no small eavor, and businesses would be well advised to work with their legal, customs, and freight providers to ensure they’re setting themselves up for success rather than a lot of unnecessary work.
Forwarders warn of rising unreasonable demurrage-detention
Forwarders are raising the alarm about what they see as an uptick in unreasonable detention and demurrage ges and “strong indications” that shipping lines are abusing the ges to maximize profits.
In a report the International Federation of Freight Forwarders Associations (FIATA), the global forwarding association said during the last few years, free time periods have been reduced and tariffs for demurrage and detention have increased considerably. Marine terminals and ocean carriers counter that they continue to use detention and demurrage as way to encourage shippers to pick up and return containers in order to boost cargo fluidity that’s challenged by the larger disges of mega-ships.
“It is understood that shipping lines have been suffering in a very tough business environment and do everything they can to develop revenue streams that are not necessarily derived from freight, but FIATA does not believe that merchants should be subjected to predatory pricing of this nature, especially as delays often occur through no fault of the merchant,” FIATA said.
Those delays out of the hands of shippers could be a result of larger container shipping call sizes choking terminals, increasing port congestion, schedules thrown out by bad weather, increasing scrutiny of cross-border documentation, and tighter security measures.
While the association agreed that demurrage and detention ges were an important tool for shipping lines to ensure the efficient use of their container stock that represented a large investment, carriers have been accused of abusing their position with “unjust and unreasonable” ges to the merchant. ⍊The opinion prevails that shipping lines abuse such ges in order to increase income and profits,” FIATA said.
Demurrage and detention
Demurrage refers to a ge that the merchant pays for a container excessively idling at a terminal without being picked up by a trucker. Detention is the ge for not returning the container to the terminal or depot within the free time period. In the case of demurrage, the terminal incurs the extra costs of acting as a storage yard, while in detention, ocean carriers miss out on a business opportunity to turn their box for other shippers needing to move freight.
But the excessive ging is on the radar of regulators. The US Federal Maritime Commission is busy with an investigation into detention and demurrage practices that it launched in early 2017 following a petition from the Coalition for Fair Port Practices, a group comprising 26 organizations representing thousands of US shippers, in December 2016.
FMC Commissioner Rebecca Dye and Acting Chairman Michael Khouri expressed an inclination to broker a business solution to resolve the detention and demurrage issue, rather than formal rulemaking.
“Rulemaking is not our first choice, but at the of the day if there are persistent practices that are found to be unjust and unreasonable, and stakeholders do not want to listen and proactively adjust business practices, then [rulemaking] will remain on the list,” Khouri said.
After the meeting, Dye told JOC.com no such behavior has been exhibited by shippers, ocean carriers, or terminals.
“We will decide [in December] how to best implement change ... but I am not feeling any lack of cooperation. We can’t drive meaningful change in the industry without leaders stepping up, and they are doing that right now,” Dye told JOC.
Less expensive to store container in Midtown Manhattan
However, the FIATA report said demurrage and detention ges have been known to accrue to 20 times and more than the value of the container itself. The forwarder association referred to one extreme example where an FMC witness noted that it would have been less expensive to park his container in Midtown Manhattan than at the Port of New York-New Jersey. (Midtown Manhattan in New York City is the world’s largest central business district and has some of the highest parking rates in the world.)
A National Retail Federation and Coalition for Fair Port Practices release in December 2016 gave three examples of excessive ging:
-A retailer was ged $80,000 because it took up to nine days to retrieve containers when only four free days were allowed.
-A trucking company was ged $1.2 million after long lines at New York and New Jersey ports kept it from returning containers on time.
-A transportation company was ged $1.25 million after containers it tried to return were turned away at West Coast ports; the amount was eventually reduced to $250,000 but only a year after the company was forced to pay the fees upfront.
FIATA has released a best practices guide aimed at protecting shippers from ges that were levied despite shippers having no way to have their containers released by the terminals. It highlighted reasons out of their control, including bad weather conditions, labor strikes, legal disputes, environmentally driven modal shifts, delays in sailing, cross-border containers blocked at customs, and above all terminal congestion.
“Labour issues, choice of terminal, and terminal congestion related to the impact of increasing size of vessels on ports and terminals that are already geographically constrained, are examples of issues that are within the control of supply chain partners, but beyond the control of the merchant,” FIATA said.
“These issues lead to detention and demurrage ges for merchants who are unable to obtain release of laden containers or return empty containers through no fault of their own. There is no logic insisting on a ge that is supposed to motivate the merchant to pick up or return a container quickly if the terminal is not able to comply with this request.”
FIATA suggested that commercial partners negotiate terms to ext free time for a period that was equal to the duration of the inability of the terminals to release a container for import or receive a container for export, and the inability of the depots to receive an empty container.
The introduction of mega-ships has led directly to increasing delays and dwell times within terminals, FIATA said. Many terminals and landside operations were dealing with bigger vessels, bigger peaks, congestions and unreliable vessel schedules.
Higher peaks led to a greater concentration of land side delivery and pickups, with the result that many ports also have to deal with road congestion. The association said while additional landside infrastructure investment might be required, the easing of peaks through exted free time periods must be considered as well.
“Instead of decreasing free time periods, FIATA suggests that commercial
partners negotiate an increase in free time periods to allow merchants more flexibility in their planning. ”