Apparel and textile companies may benefit from tariff engineering using new rules of origin from the USMCA.
The concept and practice of tariff engineering has a long history that dates as far back as the late 1800s. Companies, in order to keep costs down on their imported goods, changed their sourcing process and modified their products to classify under a lower duty tariff rate.
With tariff engineering, importers and manufacturers design, modify, and build products to qualify and benefit from a lower rate of duty applied upon import. It is important that before the design process begins, the impact of tariffs in relation to materials, fiber content, construction, design features and the intended use of the product, be considered and reviewed. Sometimes the slightest tweaking and modification to a new or existing product (such as the addition of a particular component or the placement of a feature) is all that is needed to favorably change the classification. Two products can look very similar, but with further review, the classifications are different with one qualifying for potentially lower duty and taxes.
Tariff amounts are dictated by the Harmonized System (HS code) classification system and used by customs authorities globally to identify the duty and tax rates of various products.
Two well-known examples of apparel and footwear companies/brands who regularly practice tariff engineering are Converse Sneakers and Columbia Sportswear. Converse, a Nike company, uses tariff engineering to import shoes at a lower cost. For years they have added a felt lining on the sole of their sneakers that serves no purpose but to qualify for a lower duty rate of 3% instead of up to 48%. By adding the felt lining it allows the company to classify their product as slippers and so benefit from a much lower tariff rate.
Columbia Sportswear has been practicing tariff engineering for several years by designing apparel and other products with consideration of how the product aligns with tariff codes in order to reduce costs. For example certain women’s shirts are intentionally designed with little pockets placed below the waist that reduces the duty rates from 26.9% to as low as $16%.
U.S. exporters to Canada can look to the USMCA free trade agreement for potential tariff engineering opportunities using the guidelines – specifically for textile and apparel goods – to design and build products that qualify for preferential tariff treatment. There are measures designed to encourage the use of North American inputs such as sewing thread, narrow elastics, and pocketing fabric. These products must be North America-produced finished goods in order to qualify for Tariff Preference Levels (TPL). TPL is a provision that allows for duty free treatment of a specific quantity of non-originating products (goods that do not meet the rules of origin).
Tariff engineering can be applied to a variety of products but it’s a complex process that requires precision and a strong understanding and knowledge of the HS tariff classifications and codes. Importers and manufacturers looking to apply tariff engineering in their design and development process should consult a customs broker or trade compliance specialist for guidance and help with classifications. Consider a review and analysis of your products and evaluate if changes can be made to impact tariffs. Also, ensure that the cost of manufacturing, materials used, as well as marketing the product doesn’t outweigh the benefit of the potential tariff reduction. With proper planning and classifications, companies can discover and benefit from the cost savings.