Tariff Engineering: Where the Little Things Truly Matter
You’ve probably heard about the term “tariff” or duty at least once in your life, but you may not have heard of the term Tariff Engineering.
In simple terms, a tariff is a type of tax that the government imposes on imported goods from other countries which results in higher prices of the said goods in order to make their cost more in alignment with those being made domestically.
Tariffs are a huge cost to importers and especially in times of trade wars and economic problems, tariff rates are always fluctuating. But tariffs have been around for decades, and for as long as they’ve been in place, companies have tried to find ways to minimize what they owe. Tariff rates can change significantly based on a small design detail, and some companies have spent the time figuring out how to design apparel and products in accordance with American tariff policy.
Tariff Engineering is a study or a legal process on how companies can make small changes in their design processes in order to reclassify their final product under a more favorable duty category (ie they’ll pay less in duties) at the time of importation.
It’s legal as long as the changes are not removed after importation. You’d be surprised at how the slightest and smallest details can make such a huge impact! Read below for some creative moments when tariff engineering was applied:
FASHION TARIFF ENGINEERING
You’re probably familiar with this brand: Converse. Nike owns the Converse brand and it is undoubtedly one of the most famous sports brands in the world. Converse is one of the companies who executed tariff engineering perfectly. They designed their shoes in a way that they put layers of felt on the sole, covering more than 50%, in order to reclassify their product as slippers rather than shoes.
With this tactic, they were able to generate duty savings because importation duty rates of shoes to the United States can be as high as 37.5% while the duty rates for slippers upon importation is only 3%. That’s a huge savings just by adding that extra layer of felt on the soles.
Another great example would be the case of Columbia Sportswear. Columbia Sportswear has been around for decades and is one of the biggest apparel manufacturers in the world. Columbia Sportswear is an expert when it comes to tariff engineering. Since most of Columbia’s items are made abroad they carefully align their design process with tariff codes in order to reduce costs. To accomplish this, their design team collaborates with trade experts.
Next time you are in an REI, Kohl’s or other store that sells Columbia apparel, their women’s shirts. You will see that there are tiny pockets just below the waistline. These tiny pockets are functional (they are big enough to hold a key or a credit card), but they serve a much greater purpose: reducing the tariff rate. American Tariff policy states that tariff rates for imported women’s blouses made from man-made fibers can be as high as 26.9% but if there are pockets below the waist they are excluded from this and the tariff rate can go as low as 16%.
Another interesting example of tariff engineering is in the case of Marvel’s Action Figures. In 1995, the team at Marvel fought to reclassify their action figures from dolls to toys because their action figures are non-human. According to the American Tariff Policy, dolls are classified as a representation of human beings. Marvel successfully won their case by successfully arguing that their action figures did not represent human beings. This was very significant and was a huge win for Marvel and their customers because the tariff rates of dolls are at 12% while toys enjoy a tariff rate of only 6.8%.
Bottom line it is worth every penny to know that your goods are being imported under the correct tariff. And it could potentially save you lots of money if you could find a legal and economical way to re-classify or re-design your product to fit within a lower tariff code. It’s remarkable how specific the tariff codes are and what may seem a trivial design element may have a huge impact on the final cost of the product. Gallagher can’t help with re-designing your products, but we can make sure your goods are classified correctly. If you have any questions, Gallagher is always ready to help.